Is it a good idea to refinance a house?

Few things in life last as long as your home mortgage. If you’re like most homeowners, you opted for a 30-year loan when you bought your house. Over time, things change — and your mortgage should be able to change with you, too. 

That said, it’s not always a good idea to refinance a house, depending on your reasons and your current circumstances. Let’s investigate some reasons why you wouldn’t want to refinance your house.

5 reasons not to refinance your home

It’s always good to be clear on your goals when you’re making a change. If you’re clear on your reasons for refinancing, it’ll help you understand reasons not to refinance your home. 

Something that drives one homeowner to refinance — like switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage — might be the very reason why another homeowner chooses not to refinance, for example. Here are some other common reasons why you might want to think twice, depending on your goals: 

If you can’t afford the closing costs

Lenders vary, but you can expect to spend anywhere between 2% and 6% of the loan amount in order to refinance your mortgage. Some lenders offer “no-closing-cost refinances,” but they typically make up for those fees by charging a higher interest rate or by tacking those costs onto your final loan amount, which essentially means you’re financing those charges. 

If you opt to finance your closing costs, you’ll be paying interest on that borrowed money for the remainder of your loan term, which can make them significantly more expensive.

If you can’t get a lower rate

Lenders take lots of factors into account when setting your mortgage rate, such as your credit score, other debts, and the overall economy. That impacts how much you’ll pay every month, as well as the total interest you’ll pay over the long term. 

If the Federal Reserve sets a high baseline for interest rates, securing a lower interest rate on your mortgage than your current APR may be difficult or impossible, even if you’ve taken steps to improve your credit report and overall creditworthiness. That can make refinancing your home less cost-effective. 

If you’ll be moving soon

You’ll typically pay most of the same closing costs as when you took out your first mortgage when you refinance, such as appraisal fees, origination charges, and title insurance. Often, that equates to 2% – 6% of your loan amount. 

It can actually take a few years before your investment in a more affordable mortgage pays off, given these upfront costs — something that financial experts call the break-even point, which you can calculate online. 

Here are a few examples:

If you plan on selling your home before your mortgage refinance reaches its break-even point, you could end up losing money on the deal. In that case, it might be cheaper just to stick it out for a bit until you can get rid of your current mortgage entirely. 

If you’re consolidating other debts

A cash-out refinance is one option for paying off higher-rate debt, such as credit card or personal loan balances. The interest rates on a cash-out refi are often lower than other types of debt consolidation loans, which can save you money — but there are big drawbacks, too. 

If you have a spending problem, for example, paying off your credit card debt simply refreshes your credit limit so that you could be tempted to spend more. It also reduces your ability to borrow against home equity in a true emergency, like if you lose your job. 

Finally, it switches your consolidated debt from being unsecured to secured, so it’s harder to discharge in bankruptcy. Plus, it puts your home more at risk of foreclosure in case you fall behind on your new debt. Experts recommend using home equity very cautiously when consolidating debt for these reasons. 

If it increases your long-term loan costs

A major reason why homeowners refinance is to lower their monthly payment. That’s a noble goal, but it’s easy to lose sight of an even bigger price tag: the total interest. 

Often, lenders are able to offer lower monthly payments by lengthening your loan term, which only increases your long-term loan costs. Even with a lower interest rate, homeowners are often surprised at just how much more expensive refinancing can be over the long run. 

Here’s a comparison of two refinancing scenarios that help illustrate the differences:

How to know when refinancing your home is worth it

Here are a few checks that’ll help you assess whether any mortgage refinance opportunity is worth it:

• You know exactly how much it’ll cost you: You’re looking to compare two numbers: your monthly payment amount, and the total interest you pay over the life of the loan. Don’t lose sight of one while you’re focusing on the other. It’s relatively easy to use mortgage refinance calculators to help you understand your true costs.
• You’ve got a good handle on your finances: Knowing whether your new loan fits into your short- and long-term money goals requires a detailed understanding of your financial plans. Make sure you’re able to fit your new monthly payment into your budget, and that the long-term costs don’t detract from your other financial goals, like retiring. 
• You’re clear on your reasons for refinancing your mortgage: “Getting a lower interest rate” is a good idea, but what does it help you do? If you’re looking to save money over the long run, for example, it’s important to use a refinance calculator to make sure your new loan isn’t actually costing you more than you bargained for. 

Alternatives to refinancing your home

You can find just as many good reasons not to refinance your home as there are legitimate reasons for proceeding. In either case, it’s good to review some alternatives first, so you can identify if something else is a better fit:

• Forbearance: If you’re having trouble paying your mortgage due to temporary problems like a job loss, ask if your lender offers mortgage forbearance. This lets you hit the pause button, deferring your mortgage payments until later. 
• Mortgage recast: If you can make a lump-sum payment toward your mortgage along with a recasting fee of a few hundred dollars, your lender may recalculate lower monthly payments while keeping your other loan terms and rates the same.
• Make extra payments: If you’re trying to pay off your home faster and save money on interest, you can always just send in extra money, assuming there are no prepayment penalties. You can make lump-sum payments or pay extra with your regular payments. 
• Home equity investment: This non-debt option offers access to a lump sum of funds in exchange for a portion of your home’s future equity growth. Home equity investments require no monthly payments and are typically repaid in 30 years. 
• Home equity loan or HELOC: If you need access to funds but don’t want to do a cash-out refinance, you can take out a second mortgage in the form of a home equity loan or HELOC. This lets you keep your primary mortgage in place and untouched.