When It Does and Doesn’t Make Sense to Refinance

Unsure of when to refinance? Here’s what you need to know.

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When does it make sense to refinance? When should you hold off?

Before I answer this question, let me say I’m not a mortgage lender nor a financial advisor, and I encourage you to consult with a trusted mortgage professional before you take any course of action.

It's been my experience that there are two schools of thought when it comes to debt. One believes that all debt is bad and needs to be paid off as soon as possible and living debt-free is the ultimate freedom. The other school of thought sees good debt as a way to build wealth. If living debt-free is your goal, I can think of two specific situations when refinancing might not be a good idea.

The first is if you’ve been paying off your home for several years. Refinancing a mortgage means paying off an existing loan and replacing it with a new one. As I am sure you know, in the early years of your mortgage term, your payments are primarily going toward paying off interest. In the later years, you begin to pay off more principal than interest, meaning you start to build up equity (i.e., the amount of your home that you actually own). Once you refinance, it’s like you’re starting all over again.

Refinancing a mortgage means paying off an existing loan and replacing it with a new one.

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Say you’ve been paying off your old mortgage for 10 years and you have 20 years left to go. If you refinance into a new 30-year mortgage, you start at 30 years again. Sure, you might enjoy lower monthly payments, but that benefit will be offset by the higher lifetime cost of borrowing.

The second situation is when you know you will be moving sooner rather than later. Refinancing is expensive and can cost thousands of dollars. You need to figure out exactly how much your refinance will cost and how much you’ll save each month. If it will take three years to recoup the expenses of a refinance and you plan on moving within two years, that means despite the lower monthly payments, you won’t save any money at all.

There are situations when it makes sense to refinance. If you don’t plan on moving in the next few years, your current interest rate is 6% or higher, and your credit score is good, refinancing might be something worth looking into. Or if your current rate is not significantly higher but you have 25 years left on your loan and your financial situation has changed to allow you to refinance with a 15-year mortgage, that might also be worth looking into.

If refinancing is something you are seriously considering, please allow me an opportunity to refer you to one of my trusted mortgage professionals. They will evaluate your particular situation and guide you to make a financially sound decision. If you believe that taking on a good debt can accelerate your wealth-building, stay tuned for my next video blog, where I’ll discuss this topic further.

If you have any other real estate questions, feel free to reach out to me as well. I’d love to help you.