- Business Insider talks to Darrin English, Quintic Bank’s community life development loan officer, about when it might be a bad idea to refinance your mortgage.
- English said you probably do not want to refinance if you do not save enough to offset the cost of closure within the first 2 1/2 years.
- Certain strategies to reduce your monthly payments, such as refinancing to a longer term or switching from a fixed to adjustable rate, can cost you more in the long run.
- Refinancing to use the cash for unnecessary purchases or to invest in the stock market may not be the best idea, and refinancing to compensate for loss of income due to the coronavirus may not work out.
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There are plenty of reasons to finance your home – better rates, lower monthly payments, and getting rid of private mortgage insurance are just a few of them.
But there are times that refinancing is not the best financial decision. Darrin English, Senior Community Development Loan Officer at Quontic Bank, spoke with Business Insider about what some think are “good reasons” to refinance – but in reality are rarely the best idea.
Just like with your initial mortgage, you have to pay closing costs when you refinance your home. Final costs typically amount to thousands of dollars.
If you are pursuing a new rate that is a fraction of a percentage point lower than what you are currently paying, it may take you a long time to save enough to offset the closing costs.
Homeowners in New York and California must also factor in the mortgage rates of the states.
“New York and California are the only two states in the nation that have a mortgage tax,” English said. “If you borrow $ 500,000 or less, you will be required to pay the state 1.8% of the amount you borrowed. If you borrow more than half a million dollars, you will be required to pay 1.925%. of the amount. So your closing costs can be substantial. “
English said that the rule of thumb is that you should only refinance if your new rate will be at least 1% less than what you are paying now. Another way to look at it is that you will have to break even in 2 1/2 years.
“This was actually a rule for housing and urban development at one point, and it has become the standard,” said English. “I’ve been in the business for almost 25 years now, so I just love it because I’ve seen success.”
If you only have 20 years left on your mortgage, for example, it may seem like a good idea to refinance another 30-year mortgage. By extending your remaining payments over a longer period, your monthly payments will be lower.
But English usually does not recommend this strategy, especially if you plan to stay home for a long time. You will make longer payments on your home, and you will eventually pay more in interest by extending your loan term.
“If you are considering paying for your home as part of your retirement plan, it is probably not a good idea to take out a new 30-year mortgage,” he said. “It’s always better to keep your current payment – than if you are going to repay, to refinance in the short term. Consider a 15-year period, especially if the rate is low enough, where you can keep your monthly payments almost close. you pay, and reduce the term. You would be better off. “
When applying for a mortgage, you can choose between two basic types of loans: fixed rate mortgages and adjustable rate mortgages, such as ARMs.
Fixed-rate mortgages lock down your rate for the entire life of your loan, and ARMs secure your rate for the first few years, and then change your rate periodically.
Adjustable rates typically start lower than fixed rates. So you can try to refinance a mortgage with a fixed rate in an ARM so that you can score 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 mortgage with a fixed rate in an ARM just to reduce the monthly payment,” said English, “simply because even if it is fixed for a period of time you can measure , you do not really know where the economy will be once that loan starts to adjust. “
By refinancing now in an ARM, you risk paying more later.
Maybe you want to refinance so that you can spend the money and invest the money in the stock market, or b) make lower payments and invest the monthly savings in the market.
“I would not actually recommend that,” said English. “Is there ever a time? Sure. But would I recommend it? Absolutely not. The stock, just as irreplaceable, is cyclical. And there are things you just can not predict.”
“That will be better than your house?” he went on. “It’s all based on jurisdiction. If you lived in New York in 2006, when we were at the beginning of a new real estate cycle, you could buy a two-family home in a prime area of Brooklyn,” said Bedford-Stuyvesant. “$ 525,000. That same house is now worth almost $ 2 million. If the money is invested in real low-risk stocks, would you be able to manage it incredibly well? I can not say that you will.”
If your home has been getting value since you bought it, repaying a sum of money can be a good way to use your equity and pocket money for other expenses. But you need to think carefully about which costs are worth refinancing and which are not.
“If you are going to pay out to consolidate debt – reduce your monthly payment by spreading the amortization over 30 years and reducing the interest rate – then in any case it makes sense to cash out,” English said. “If you’re looking to invest in another home that will perform the current placement, then absolutely. If you’re just looking to move away or do something awesome, it’s probably not the best way to earn your hard earned money. to spend money. “
Ultimately, it is up to you whether an issue refinance exists. Just be sure you 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 may not be possible. If you have already lost income, your lender will probably not approve your application.
English said that refinancing can be the right move if you think you will lose your income soon.
“If you are looking to increase your savings and cut expenses, this may be the absolute best time to do it,” he said. “Especially when you think your job will overtake you.”
But if you think your job may go ahead before you close your new loan, it’s probably too late to refinance. You must still have a constant income until the refinancing process is completed.
