Before deciding whether a new mortgage to replace the current one, determine what it is you want to accomplish before anything else. Remember, refinancing a mortgage doesn’t pay off the debt; it just restructures it, often at a lower interest rate and possibly a different loan term than the current mortgage. Just so you guys don’t jump ship too early, here are three situations where it simply doesn’t make financial sense to refinance:
1) Your mortgage is old
In a mortgage, the proportion of a payment credited to the principal of the loan goes up each year while the proportion credited to the interest goes down. This means in the later years of a mortgage, more of a payment applies to principal and helps build equity. By refinancing late in a mortgage, you will restart the amortization process, and most of your monthly payment will be credited to paying interest again and not to building equity. However, if you refinance to a lower rate and a shorter term, the interest expense may still be in your favor. It’s worth asking a mortgage professional.
2) Your current mortgage has a prepayment penalty
A prepayment penalty is a fee that some lenders may charge if you pay off your mortgage loan early; to include a refinance. If you refinance with the same lender, ask whether the prepayment penalty can be waived. Consider the costs of any prepayment penalty against the savings you expect to gain from refinancing. Paying a prepayment penalty will increase the time it will take to break even, when you account for the costs of the refinance and the monthly savings you expect to gain.
3) You plan to move or sell your home in the next few years
The monthly savings gained from lower monthly payments may not exceed the costs of refinancing. You may want to consider an adjustable rate mortgage, if you are confident that you will not remain in your house for an extended time, doing the math to see if refinancing makes sense. Sometimes ARMS offer better terms.