Three Reasons Not to Refinance

When a doctor taps your knee with a rubber hammer, your body's natural reaction is to kick.  Similar knee-jerk reactions occur when you examine the monthly savings of a mortgage refinance.  But if you close on a loan without knowing some of the reasons not to refinance, you may wind up kicking yourself.

There's a simple measurement for deciding whether or not to refinance your mortgage:  time.  Get past the allure of lower monthly payments, or cashing out a big chunk of money, and take a good look at the refinance deal to see if it will stand the proverbial test of time. Before you sign any dotted lines, consider these three reasons not to refinance:

1.  Lower monthly payments are an illusion

Cash flow is a problem for most people, which is why so many mortgage brokers dangle monthly savings as a carrot for refinancing.  Refinancing your loan to a lower rate can yield some significant monthly savings, but it has a catch:  long-term, you may end up paying more.

You could, for example, move from a 6 percent fixed-rate product to an adjustable\-rate mortgage (ARM) with a low introductory rate of 5 percent.  The monthly savings could be hundreds of dollars, depending on your loan amount.  

However, that rate is going to adjust after an introductory period, forcing you to either refinance your loan, or pay a higher rate.  Be sure you take into account how much those increases will cost you over time.  In the long run, your current fixed-rate mortgage won't be nearly as expensive as the refinanced adjustable-rate one.

2.  Cash now, pay later

A favorite tactic of lenders is to dangle huge sums of money in front of prospective borrowers: "Get $10,000 right now!"  You don't get this money by winning a contest, however.  You get it by tapping your home equity.  

A cash-out refinance can be especially detrimental if you refinance your mortgage to a higher rate.  Let's say, for example, that you have a current mortgage at 6 percent.  If you close on a cash-out refinance mortgage at 7 percent, not only will you pay interest on the equity you just tapped, but you're also upping the interest rate on your existing mortgage by 1 percent.  Not a smart move over the long haul.

3.  Afraid to tell the truth

If you're afraid to tell your financial advisor about the deal, then take it as a sign that you're making a bad move.  If you find yourself unable to share details of the loan because you know, deep down, that's it's not a good long-term move, you may want to rethink your options.

In our frenetically paced world, time is a luxury.  For a person considering a mortgage refinance, it's a necessity.  Before you sign on the dotted line, take time to share the loan details with a trusted financial advisor.  If a refinance will look good year after year, then go for it.  Otherwise, you may want to wait for a better deal to come along.