7 Reasons Not to Refinance Your Mortgage

Refinancing your mortgage involves taking out a new loan to pay off your existing mortgage, and, in doing so, hopefully getting a lower interest rate. However, there are several scenarios where refinancing wouldn’t be the best decision, such as if you’d end up with a longer repayment term or save too little to offset the costs.

Key Takeaways

• Refinancing will sometimes cost you more in interest in the long run, particularly if you extend your repayment term.
• The upfront costs of refinancing could mean that, even if your monthly payments decrease, you won’t break even before eventually moving.
• A cash-out refinance can provide you with additional funds for investing, but this is typically a risky move.

1. Consolidating Debt

When you get a cash-out refinance, you can leverage some or all of your home equity to take out a larger loan amount. In addition to repaying your old mortgage, this means you’ll also have excess funds that can be used to pay off your other outstanding debt. If you’re able to secure a lower interest rate, then consolidating debt in this manner can simplify your monthly payments and save you money in the long run.

However, if the reason you had so much outstanding debt was due to poor spending habits (presumably with a credit card), then refinancing will only provide a temporary solution. If you rack up new credit card debt on top of your now larger mortgage balance, you may be unable to afford your monthly payments for the latter, which might mean losing your home.

Refinancing may still be a good option if you need to pay down debt that’s grown out of control, but first you’ll need to address your spending habits to reduce your reliance on credit.

2. Getting a Longer Repayment Term

In addition to securing a different interest rate, you can also get a new repayment term when you refinance. While increasing your repayment term typically coincides with lower monthly payments, since they’re spread out over an extended period, you’ll also likely pay more over the life of the loan due to the interest having more time to accrue.

For some, having outstanding debt for a longer period is worth the breathing room it provides their monthly budgets. However, if you’re refinancing simply to get that lower monthly payment without thinking about the long-term costs, you could be inadvertently setting yourself back.

In order to determine how different repayment terms and interest rates affect your monthly and total payments, consider using a mortgage calculator.

3. Saving a Little Each Month

Refinancing just to save a little money each month sounds good in theory, but it’s easy to overlook the total costs in favor of small savings. When you add up expenses like appraisal fees and closing costs, refinancing typically costs around 3%–6% of the loan amount.

So if you’re refinancing a $500,000 mortgage, you might pay around $15,000 to $30,000 upfront. That means if you’re able to save $100 per month on your mortgage payment by securing a slightly lower interest rate, it would take around 12.5 to 25 years to offset those costs. Even if you ultimately come out ahead, you may not want to wait that long to break even.

4. Saving for a New Home

Refinancing your mortgage can potentially help you save for a new home. For example, if you can reduce your monthly payments via a lower interest rate and/or longer repayment term, you’ll have a little extra each month that you can put toward a down payment.

However, if you’re expecting to move within a few years of refinancing, you could end up costing yourself more than you’d save. As previously mentioned, it can take a couple of years to recoup the upfront costs of refinancing. So if you move before reaching your breakeven point, you’ll lose money on the refinance.

5. Changing the Loan Type

Another common reason to refinance is to get a different kind of mortgage, such as swapping an adjustable-rate mortgage (ARM) for a fixed-rate one, or vice versa.

Switching to a fixed-rate mortgage means you won’t have to worry about your interest rate rising, but you could still end up overpaying if interest rates eventually fall. Even if you decide to refinance again in the future to secure that lower rate, the additional closing costs could eat into those savings.

Meanwhile, if you’re switching to an ARM, then the risks are a bit more complex. Maybe you’ll get lucky and your rates will stay low throughout the life of your loan, but that’s unlikely. Since it’s difficult to predict whether rates will rise or fall, there’s no way to know exactly how much you’ll owe each month. So not only could you end up paying more than you would with a fixed rate, that uncertainty will make budgeting trickier.

6. Freeing Up Money for Investing

If you need money, you may be tempted to tap your home equity. However, when you get a cash-out refinance, those funds technically aren’t yours to keep. You can use them as you see fit, but you’ll still need to pay that amount back.

So if you invest that money, there’s an inherent risk you’ll lose it (or won’t earn sufficient returns). Should your investment falter, you’ll then have less capital to pay back your now larger mortgage.

7. Getting a No-Cost Mortgage

With a no-cost mortgage, you won’t be charged any upfront closing costs when refinancing. That may sound like a good deal, but you’ll most likely still end up paying those costs, they’ll just be rolled into the new loan amount or the interest rate will be raised to compensate.

You could still come out ahead in this scenario, but you’ll need to run the numbers and see what makes sense for your situation, rather than letting the offer lure you in.

Are There Limits on How Often You Can Refinance Your Mortgage?

Technically, there’s no limit on how many times you can refinance your home, at least from a legal perspective. That said, lenders may impose their own limits, typically to prevent borrowers overwhelmed by debt from constantly refinancing.

Moreover, each time you apply to refinance your mortgage, lenders will look at factors like your credit score, home equity, and debt-to-income (DTI) ratio. If you’re found lacking in these areas, you might not get approved for the refinance anyway. Additionally, you may not want to refinance too many times, as each time you do lenders will usually pull your credit report, which causes a temporary dip in your credit score

The Bottom Line

Refinancing your mortgage isn’t a decision to make lightly. While there’s plenty of situations when doing would work out in your favor, it’s easy to fall into the trap of lowering your monthly debt payments at the expense of your long-term savings. So before refinancing, be sure to calculate the total costs and confirm that this would be the best choice for your financial situation.