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- Business Insider spoke to Darrin English, Senior Community Development Loan Officer at Quontic Bank, to find out when refinancing your mortgage might be a bad idea.
- English said you probably wouldn’t want to refinance if you don’t save enough to offset closing costs in the first two and a half years.
- Some strategies to reduce your monthly payments, such as longer-term refinancing or going from a fixed rate to an adjustable rate, could cost you more in the long term.
- Refinancing to use cash for unnecessary purchases or to invest in the stock market may not be the best idea, and refinancing to make up for lost income from the coronavirus might not work.
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There are many reasons to refinance your home – better rates, lower monthly payments, and the elimination of private mortgage insurance are just a few.
But there are times when refinancing isn’t the best financial decision. Darrin English, Senior Community Development Loan Officer at Quontic Bank, spoke to Business Insider about what some people see as “good reasons” to refinance – but in reality, these are rarely the best idea.
Just like with your original mortgage, you will have to pay closing costs when you refinance your home. Closing costs typically run into the thousands of dollars.
If you are looking for a new rate that is a fraction of a percentage point lower than what you are currently paying, it may take a long time to save enough to offset closing costs.
Homeowners in New York and California should also factor in state mortgage taxes.
“New York and California are the only two states in the country to have a mortgage tax,” Mr. English said. “If you borrow $ 500,000 or less, you will have to pay the government 1.8% of the amount you borrow. If you borrow more than half a million dollars, then you will have to pay indicate 1.925% of the amount. Your closing costs can therefore be considerable. “
English said the rule of thumb is that you should only refinance if your new rate will be at least 1% lower than what you are currently paying. Another way to look at it is that you should be able to break even in 2.5 years.
“It was actually a housing and urban development rule at one point, and it has become the norm,” English said. “I’ve been in the business for almost 25 years now, so I hold it to be true because I have seen success.
If you only have 20 years left on your mortgage, for example, it might make sense to refinance another 30-year mortgage. By extending your remaining payments over a longer period, your monthly payments will be lower.
But English generally does not recommend this strategy, especially if you plan to stay home for the long term. You will be making payments on your home longer, and you will end up paying more interest by extending the term of your loan.
“If you are considering paying off your house as part of your retirement plan, it’s probably not a good idea to create a brand new 30-year mortgage,” he said. “It’s always best to keep your current payment or, if you plan to refinance, refinance for a shorter term. Consider a 15-year period, especially if the rate is low enough that you can keep the monthly payments at a low. level close to what you pay for, and reduce the term. You’d be better off. “
When you apply for a mortgage, you choose between two basic types of loans: fixed rate mortgages and variable rate mortgages, or ARMs.
Fixed rate mortgages lock in your rate for the duration of your loan, and ARMs lock in your rate for the first few years, then change your rate periodically.
Adjustable rates generally start lower than fixed rates. So you might be tempted to refinance a fixed rate mortgage into an ARM so that you can get low rates for the first five, seven, or 10 years and have lower monthly payments in the short term.
“I would never suggest refinancing a fixed rate mortgage into an ARM just to reduce the monthly payment,” English said, “just because even though it’s fixed for a period that you can measure, you don’t know really where the economy will be once the loan starts to adjust. “
By refinancing into an ARM now, you risk paying later.
Perhaps you want to refinance so that you can either a) cash out and invest the money in the stock market, or b) make lower payments and invest the monthly savings in the market.
“I really wouldn’t recommend that,” English said. “Is there ever a time? Sure. But would I recommend it? Absolutely not. The stock market, just like real estate, is cyclical. And there are things you can’t do everything about. just not predict. “
“So, is this going to outperform your house?” He continued. “It’s all based on jurisdiction. If you lived in New York City in 2006, when we were at the start of a new real estate cycle, you could have bought a two-family home in a prime area of Brooklyn,” says Bedford-Stuyvesant , for $ 525,000. That same house is now worth almost $ 2 million. If the money is invested in very low risk stocks, could you outperform real estate? I can’t say you will. “
If your home has appreciated in value since you bought it, a cash refinance could be a good way to tap into your home’s equity and spending money for other expenses. But you need to think carefully about which costs are worth refinancing and which are not.
“If you’re going to be withdrawing to consolidate the debt – reducing your monthly payment by spreading the amortization over 30 years and reducing the interest rate – then by all means a withdrawal makes sense,” Mr. English. “If you are looking to invest in another home that will outperform its current investment, then absolutely. If you’re just looking to go or do something frivolous, this probably isn’t the best way to spend your hard-earned capital.
Ultimately, it is up to you to decide whether an expense constitutes refinancing. Just be sure to weigh the pros and cons.
If your finances took a hit during the coronavirus, you might be thinking about refinancing to cut costs. The only problem is that it might not be possible. If you’ve already lost income, your lender likely won’t approve your application.
Mr. English said refinancing might be the right solution if you think you’ll be losing income soon.
“If you are looking to increase your savings and reduce your expenses, this might be the best time to do it,” he said. “Especially if you think your job is going to leave you.”
But if you think your job might fire you before you take out your new loan, it’s probably already too late to refinance. You should still have a stable income until the refinancing process is complete.
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