Should you refinance your home? Not before reading this.
Refinancing a home is a major financial decision. You’ll need to apply for a brand new mortgage loan, either from your existing lender or from a different one. And if you’re approved, you’ll owe closing costs during the transaction process, which can add up to 2% to 5% of your loan’s value.
That said, while the process can be complicated and cost you several thousand dollars up front, it can be the right decision in many circumstances if it saves you money on paying off your home loan. Since your mortgage is probably your largest debt, reducing the cost of it could free up money in your monthly budget if you lower your payments, and it could potentially save you money over time as well.
However, sometimes refinancing undoubtedly is not the right choice. Here are three red flags that suggest it’s not a good time for you to get a new home loan.
1. You’ll be moving soon
If you’ll be relocating soon, refinancing typically will not pay off. That’s because the savings you can realize from dropping your interest rate really only materialize over time.
Even if you drop your rate quite a bit, you may only reduce your monthly payment by a small amount each month. It can take years for the small reduction in your monthly payment to add up to enough money to cover the closing costs you had to pay up front.
You can figure out how long you’ll have to stay put in your house by calculating the monthly savings from refinancing as well as the closing costs and dividing the closing costs by the amount saved.
For example, if your closing costs are $5,000 and you save $40 per month with your new loan, it would take you 125 months — 10.4 years — to break even on the up front costs. If you were planning a move in the next few years, you wouldn’t make back the money you spent up front and refinancing wouldn’t be advisable.
2. You just changed jobs
Mortgage lenders typically want to see consistent proof of income in order to confirm that you’ll likely repay your loan. A recent job change is a red flag that your future income may not be that stable — which makes lenders nervous about your prospects of paying off the loan in full.
If you’ve changed jobs recently, you may want to …….