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    Question ID:   19381         Current Version: 1
Question: When is refinancing not a good idea?
Category: Business & Finance > Renting & Real Estate
Keywords: disadvantage, mortgage, loan, refinancing, refinance
Type: when
Rating:(0 ratings)    Views: 23    Discussions: 0   In Watch Lists: 1  

 
    Answer:
You've had your mortgage for a long time.

The proportion of your payment that is credited to the principal of your loan increases each year, while the proportion credited to the interest decreases each year. In the later years of your mortgage, more of your payment applies to principal and helps build equity. By refinancing late in your 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.

Your current mortgage has a prepayment penalty

A prepayment penalty is a fee that lenders might charge if you pay off your mortgage loan early, including for refinancing. If you are refinancing with the same lender, ask whether the prepayment penalty can be waived. You should carefully 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.

You plan to move from your home in the next few years.

The monthly savings gained from lower monthly payments may not exceed the costs of refinancing--a break-even calculation will help you determine whether it is worthwhile to refinance, if you are planning to move in the near future.

Source: Federal Reserve Board
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[QID:19399]    What will mortgage loan refinancing cost?  
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[QID:19400]    What is "no-cost" refinancing?  
[QID:19382]    Am I eligible to refinance?  
[QID:19401]    How can you shop for your new loan?  
[QID:4299]    What are the basics about mortgage rates?  
[QID:19465]    What are the points of a mortgage loan?  
[QID:19597]    What is the mortgage application process?  
[QID:19481]    What is prepaid interest of a mortgage loan?  
[QID:19367]    What is a mortgage loan prepayment penalty?  
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