Is Waiting to Refinance Your Residential Home a Good Idea?
April 23, 2025
Refinancing without carefully considering your current financial circumstances is never a good idea, but careful planning in the current financial environment is even more important.
One of the primary reasons to hold off on refinancing is when interest rates have risen or haven't decreased much since you obtained your original mortgage.
If current interest rates are worse than your home loan rate, refinancing would likely result in higher monthly payments and an increase in the total interest you pay over the life of the loan.
Consider keeping your current mortgage and waiting for a more favorable interest rate environment. Monitoring economic indicators and mortgage rate trends can help you identify opportunities for refinancing later.
The Cost of Refinancing
Another factor to consider is the cost of the refinancing transaction, especially funding fees and other expenses. Refinancing isn't free; it involves application fees, appraisal fees, title insurance, and closing costs.
If the potential savings from a lower interest rate or more favorable terms are not substantial enough to offset these upfront costs over a reasonable period, refinancing might not be worthwhile. A good rule of thumb is to calculate your "break-even point," which is how long it will take for your monthly savings to recoup the refinancing costs.
If this period is too long, especially if you don't plan to stay in your home for an extended time, waiting might be the smarter choice.
Borrower Needs
What are your financial needs and goals? If you are planning to move soon, refinancing might not be beneficial, as you may not stay in the home long enough to recoup the associated costs.
Taking on a new mortgage obligation might not be advisable if you face uncertainty with your employment or credit.
Another reason to wait is if your current mortgage has a very low interest rate. Even a slight decrease in market rates might not be enough to justify the move. Do you currently have a mortgage with an interest rate below 4%? The potential savings from refinancing to an even lower rate are minimal and could be outweighed by the refinancing fees.
FHA and Non-FHA Loans
Consider also the specifics of your current mortgage. Non-FHA borrowers may have a prepayment penalty on the existing loan, and the cost of refinancing could be higher in these cases. A prepayment penalty is a fee the lender charges if you pay off your mortgage early, including through refinancing.
Before considering refinancing, reviewing your loan documents for a conventional or non-FHA loan is crucial to determine if such a penalty exists and factor the expense into your refinancing calculations.
FHA Loan Articles
April 30, 2025 In a previous post, we discussed why FHA borrowers should carefully consider whether paying for discount points truly serves their best interests, focusing on factors like short-term homeownership, opportunity cost, FHA mortgage insurance, and the prevailing interest rate environment. Discount points are an option for borrowers willing to pay a fee to lower the interest rate by a set amount. This is not right for all borrowers, and you don't want to pay for points you won't benefit from during the loan term.
April 29, 2025Are you considering buying a home with an FHA loan? You'll likely talk to your participating lender about FHA loan "discount points" – fees you pay upfront for a lower interest rate on your mortgage. The idea behind discount points is a straightforward exchange: you spend money today to reduce your interest rate. Typically, one point equals one percent of your total FHA loan. In return, your interest rate might decrease by an amount you and the lender agree upon.
April 28, 2025Home loans have various expenses that aren't apparent to a new borrower until much later in the process. What do you need to consider when making your home loan budget? It might not be complete without addressing some of the issues we cover here.
April 23, 2025 While the prospect of lower interest rates or more favorable loan terms can be enticing, there are situations where waiting is the better option. Refinancing without carefully considering your current financial circumstances is never a good idea, but careful planning in the current financial environment is even more important.
April 22, 2025First-time home buyers worry about loan approval, but there are important steps to take to increase the likelihood that the lender will approve their application for the loan or pre-approval. What do you need to know before you choose a lender?
