Is Waiting to Refinance Your Residential Home a Good Idea?

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.

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.