When is it a Bad Idea to Refinance

By: J Suffie

Refinancing can be a great thing if it's done at the right time. Doing it at the wrong time can cost you money, time and effort. Here are four reasons that refinancing may not be the best move.

Your Current Fixed Interest Rate Isn't Much Different Than the New Rate - If you are thinking about refinancing to a lower rate and your interest rate is less than 2% higher than the new rate, refinancing isn't going to make much of a difference. After refinancing fees, you may even end up spending more on the new loan than you would if you just stayed with your existing loan.

You Have a Fixed Rate Mortgage and the Adjustable Rate Mortgages are Looking Tempting - Please hear what thousands of overstressed and overdrawn homeowners would tell you. Don't abandon your fixed rate mortgage in order to get an adjustable rate mortgage. Those early "teaser" rates that last for two or three years cause more grief than they solve. You may believe that you will be able to afford those higher payments in a few years, but so did most people who started out with adjustable rate mortgages. Do what they wish they could do now. If you have a fixed rate, then stick with it. Adjustable rate mortgages only cause problems in the long run.

You Are Still Under a Prepayment Penalty - In most mortgages, one of the clauses is usually a prepayment penalty. A prepayment penalty states that if the mortgage is paid off within a certain period of time, generally around two to five years, the homeowner will be required to pay a penalty. Since the process of refinancing requires that the original mortgage be paid off and a new mortgage be taken out, refinancing falls into the category of prepayment. There are two types of prepayment penalty clauses. A soft prepayment penalty applies only to prepayment due to refinancing. A hard prepayment penalty applies to prepayment due to refinancing or selling your home. Be sure to read your mortgage paperwork to determine if you are still under a prepayment penalty, what type of prepayment penalty you have and what that penalty is, before proceeding with a refinance.

You Want to Go On a Vacation, Buy New Furniture or Get Plastic Surgery - Really think about what you're doing when you refinance in order to gain access to the money you have in equity. If you are pulling your equity out to upgrade your kitchen or make improvements to the actual structure of your home, that is a good use of equity because those improvements increase the value of your home. If you spend your equity on furniture it will never increase the value of your home. It may make your home look nicer, but since it goes with you when you move, your home's value will not be increased. In the same way, because it doesn't increase the value of your home, refinancing in order to get money to go on vacation, get plastic surgery or go on a shopping spree is a bad use of equity.

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