If any of these situations apply to you, you'll probably want to hold off on refinancing your mortgage.

It seems that everyone is benefiting from a mortgage refinance these days. After all, refinancing with historically low rates almost always translates into lower monthly payments, which is always a good thing, right?

Maybe. Lower monthly payments don't always mean long-term savings or a loan that is better for you in the long run.

There are always lots of factors to consider:

  • How much are the closing costs?
  • Are you spreading out your costs with a longer loan but ultimately paying more in interest?
  • Are you currently paying more principal than interest?
  • Is the rate really that much better?
  • What is your time worth and could it be better used trying to earn more money rather than saving $45 a month on your mortgage.

First of all, let's have a refinance review:

Refinancing is when you replace your current home loan with a new one.In the process of getting the new loan, you pay off your old one completely. Most people do this to take advantage of a better interest rate or to change the terms of the loan-the length of the loan or type of loan (ex. ARM vs. fixed-rate).

While refinancing often can make a difference in what you pay from month to month, there are a few situations where it definitely does not make sense to go through the process.

1) When you are close to paying off your loan

If you have already had your loan for 10-20 years, resetting it to another 30-year loan may actually cost you more in the long run. Sure, your monthly payments may be lower, but you'll now be paying them for a lot longer.

Also, if you are midway through your current loan, you have likely paid much of your interest already and are working on the principal. At this point, it just makes sense to pay off the rest of the loan rather than get a new one where you'll be paying mostly interest.

2) When the rate change isn't substantial

Many professionals suggest that you should not refinance if there is less than a 2% difference between the interest rate on your new loan and your old one. The savings are just not worth the time and effort, especially when you factor in the closing costs.

3) When you don't plan to be in your house for that long

It will take a few years to break even after paying the closing costs. If you plan to sell the house in a few years, before that break-even period, the expense of refinance is obviously not worth it.

4) When you have a small loan

When you're trying to refinance a $600,000 loan, the monthly savings can be in the hundreds of dollars per month. However, trying to refinance an $85,000 loan probably won't end up with savings substantial enough to make the time and effort worth it.

5) When your credit is not as good as it used to be

While it may seem like everyone and their dog is getting a refinance, the reality is that the regulations have tightened up as of late and it's not as easy to get a refinance as it used to be. If your credit is not as good as it was the first time around, chances are that it's not as worth your while to go through the stress and effort to get a refinance. Instead, spend the time and effort on getting your credit up to speed.

6) When you don't have the time for the refinance process

While this sounds like a bad excuse, it can actually be a legitimate reason. A mortgage refinance takes a fair amount of shopping and research. If the benefits likely won't be huge, it might not be worth your time and money.

Conclusion

A refinance is a tool and like any tool, it can be used effectively or not. And sometimes the most effective way to use it is to not use it at all.

Run the numbers with a financial planner before you start the refinance process and you might find that your best course of action is to use the money that you had set aside for closing costs to prepay your current mortgage. The money saved in interest costs over the long run might even add up to more than you would have saved through the refinance!

Published on September 23, 2009