Mortgage broker talking about when not to refinance

When Not To Refinance

Refinancing your current mortgage doesn’t always make sense, and here are some guidelines for determining when not to refinance.

We all want the lowest rate and payment possible, but sometimes, a refinance is not a good idea. It’s important to make sure you’re making informed financial decisions – especially when it comes to your most valuable asset.

When evaluating if a refinance will help you achieve your short-term and/or long-term financial goals, it’s important to evaluate the big picture to make sure it makes sense.

Suggestions on when not to refinance

I’ve worked in the mortgage industry for over 17 years. Based on that experience, here are some suggestions on when not to refinance.

You’re Planning On Moving Soon

If you’re moving in the next twelve months, you may not want to refinance. If rates are so low, and you can lock in that rate with little to no cost, then maybe…but generally speaking, if you’re moving or about to move, you’ll probably want to skip a refinance.

A move could cost $5,000, $15,000, or more, so between the cost of the move and the refinance, it’s probably not the best decision.

Not Much Savings

This is a no-brainer – if you are not saving enough money, don’t do the refinance. Current mortgage rates change daily, weekly, and monthly, so if the rate is not low enough and there are little to no savings, wait until rates move down.

How Much Savings Do You Need?

That’s up to the homeowner, and everyone’s short and long-term financial goals are different. If you are considering a rate and term refinance and want to save money every month, establishing how much you need to save before completing a loan application is a good idea.

And be realistic. Most people save between $100 – $300 per month for an average-sized loan unless the original rate is higher than usual.

The New Payment Is Too High

You might think this is even more of a no-brainer; however, I’m referring to a situation where a client moved from a 30-year fixed rate to a 15-year fixed rate. The rate will be lower; however, the payment is usually higher, so it’s important to ensure you can afford it.

It’s great to pay off your home faster, but the last thing you want to be is “cash rich, house poor.” That term is used when a homeowner can barely afford their mortgage payment and has no money left for things like going out to dinner or vacations.

Paying Too Much In Closing Costs

I’m not a big believer in paying a lot of closing costs.  

When refinancing, it’s important to keep closing costs down. If you pay points, make sure you make up the cost to buy down the rate in a reasonable time frame. You might want to reconsider paying points if recouping those points takes more than four years.

When you spend thousands of dollars on closing costs, make sure you will make that money back with a lower payment in a reasonable amount of time. I suggest recouping the cost of getting a lower mortgage rate within two to four years. That being said, the only person who can determine a reasonable amount of time is you, the homeowner.

If You Don’t Understand The Loan Terms, Don’t Do The Refinance

If you want to refinance and switch to an adjustable-rate mortgage, do not take out the loan until you fully understand the terms. Too many homeowners refinance into an adjustable-rate mortgage and don’t know what they’ve signed up for.

If you do not clearly understand the loan terms, don’t do the refinance. Stick with a fixed-rate mortgage.

Don’t get me wrong; adjustable-rate mortgages are good loans in the right situations, but they require the homeowner to understand how they are structured. For example:

  • Is there a fixed rate period, and if so, how long is it?
  • When is the first interest rate adjustment?
  • When the interest rate adjusts, how much can it adjust?
  • How often can it adjust?
  • Is there a pre-payment penalty?

That is a very short list of questions a homeowner should ask the loan officer if they are considering an adjustable-rate mortgage.

You’re In The Middle Of Remodeling Your Home

This is a big no-no with mortgage lenders. Usually, when you refinance, you’ll have to do an appraisal (not always, though), and if you’re remodeling your home, that could present some issues in underwriting. An underwriter may ask for the remodel to be finished before the closing of the loan.

If you’re lucky enough to get an appraisal waiver, which means you will not have to do the appraisal inspection, then you might be okay with moving forward. Discuss your current situation with your loan officer so they are best prepared.

You should answer these questions before doing a refinance

The question of when not to refinance is important when looking at the pros and cons of refinancing. Here are some questions you should answer before moving forward with a refinance.

What Are My Short And Long-Term Goals For The House?

Establishing your short and long-term goals for this house is probably the first question you should ask. As mentioned, if you plan on moving soon, don’t refinance.

Discuss your goals with your loan officer or tax professional so that you can make an informed decision on whether or not it’s the right time to refinance.

What Is The Current Value Of My Home

It would help if you took the time to do a little research to find the current value of your home. Most refinances require an appraisal, and not knowing the current value of your home puts you at risk of wasting money on an appraisal.

You can visit more than one website to get an idea of what your home is worth, and it’s best to use a conservative range rather than an absolute value. Online home value websites give you an idea of what it might be worth. Sometimes, these sites are way off compared to an appraisal report.

If You Are Considering Home Improvements, What Will The Estimated Value Be Post-Remodel?

This is also important to ask when doing a remodel because you want to ensure you don’t overspend. Your home will only be worth the highest comp in the area (or two). If the highest comps are $400,000, then no matter how much money you spend on a remodel, the home will not be worth much more than that. comparable sales are so important when it comes to home value.

Asking the right questions ensures you are better positioned to determine when not to do a refinance.

Do You have a question or need a quote?

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Bottom line on when not to refinance

You have the tools to decide on when not to refinance. If refinancing doesn’t make sense, costs too much, or doesn’t help you meet your short and long-term financial goals, then don’t do the refinance. To help you make the decision, you can talk to your trusted loan officer or tax professional who has knowledge about the subject.

Loan Officer Kevin O'Connor

About The Author

Loan Officer Kevin O'Connor has over 17 years of experience as a Mortgage Loan Originator and is a trusted resource for mortgage education and information. He's the content creator of K.O. Home Loan Solutions and is licensed by the state of California and the Nationwide Mortgage Licensing System. He has a top rating with the Better Business Bureau, Google, Yelp, and Zillow. You can contact him at 1-800-550-5538. CA DRE #01499872 / NMLS #247447