A mortgage refinance is a useful tool to achieve different savings goals. This program can help you consolidate debts with higher interest, for it lets you turn a large portion of your home equity into cash. Since you are replacing your current loan with a new one, you can get a lower mortgage rate or more manageable monthly payments. If your property’s value increased enough, you can even do a refi to strategically ditch your private mortgage insurance.
However, honest mortgage lenders in San Antonio, Dallas, and Houston will tell you that applying for a refinance can backfire on you. Instead of saving you money, it may actually hurt your finances in the long run. Below are the scenarios where you should consider against pursuing it.
Your Credit Scores Dipped
Treat a refinance application like any other loan request. It involves a credit check where your FICO scores will be brought under scrutiny. Your creditworthiness is just as good as what your latest credit reports say about you, so it does not matter if you used to have excellent credit. If your credit scores dropped heading into your refinance application, it will be harder for you to make a strong case for your lower interest rate request.
Fortunately, you are entitled to get a free credit report from each major credit bureau every year. Review each of the three, and make sure all of them as 100% accurate to drive your FICO scores up as much as possible.
You Have Nothing to Spend Your Cash on
A cash-out refinance can be an instant source of a handsome sum, which you can use for whatever purpose you fancy. While it is convenient, it can unnecessarily render you more indebted. A mortgage refinance can be turn out to be a bad debt if you do not use the funds you can receive out of it wisely.
If you really want to tap your home equity now even if you have no immediate financial need, a home equity line of credit (HELOC) is the better option than a cash-out refinance. A HELOC is like a credit card that you can use just when you need it. Although it may come with a minimum draw requirement, you do not have to pay anything if you do not touch the cash you can access.
You Are Planning to Move in the Near Future
A mortgage refinance has closing costs. They can offset or even exceed the potential savings you expect to reap if you do not stay put long enough to reach the “break-even” period of your new loan. For instance, applying for a refinance may not be worth the trouble if you need to pay $5,000 upfront just to save $100 per month.
If your current mortgage lender charges a prepayment penalty, it has to be taken into consideration too. It essentially increases your overall cost of borrowing since it kicks in only when pay off your existing loan to take out a new one.
Pursuing mortgage refinancing just because you can is not the wisest decision. Understand how it really works to determine whether or not it makes sense for you and make the most out of it.