6 Reasons You Shouldn't Refinance

Rates are at historic lows, but the doesn't mean refinancing is right for every homeowner.

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Beware of animals in your home or garage.
Beware of animals in your home or garage.

Millions of homeowners have already refinanced their mortgages, and some are even considering refinancing a second time. But even though rates are at rock-bottom low levels, refinancing isn't right for every homeowner. Here are six reasons why:

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1. Small loan amount: With a small loan amount, it can be hard to save enough by refinancing to make the whole process worthwhile. For example, refinancing a $750,000 loan from 5.5 percent to 4 percent can yield a monthly savings of almost $678 per month. The savings for a $75,000 loan only amount to about $68 per month.

Also, lenders often tack on additional fees or interest rate premiums for small loan amounts, so it's more difficult to get a rock-bottom mortgage rate.

2. Short timeframe: While refinancing at today's low rates can translate into big monthly savings on your mortgage bill, those savings don't come without significant upfront costs. If you have just a few years before you expect to move or even refinance again, you might not capture the savings from the lower monthly rate. There are ways to refinance and save some money with "no cost" refinance programs even if you have a short timeframe, but these options often come with higher interest rates, seriously reducing the benefits.

3. Small rate difference: Refinanacing a large loan can result in significant savings, but getting a substantially better interest rate matters just as much over the long term. While it's possible to save money by refinancing to a slightly lower interest rate, it's a painfully slow process. Given today's low mortgage rates, shoot for an interest rate of at least 1 percent lower than your current rate to make your time and effort worthwhile.

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4. A low-rate ARM: Federal Reserve policies have driven down short-term interest rates to unprecedented lows. Since some of these short-term rates govern the interest rates for adjustable-rate mortgages, some borrowers have seen their interest costs plummet as new rates have sunk to the 2 percent to 3 percent range. Refinancing to a fixed-rate loan today can eliminate the interest-rate risk that comes with ARMs, but that security comes at a cost: higher interest rates. As such, holding onto an ARM with a rock-bottom interest rate for the time being might not be such a bad idea.

5. Inertia and hassle: Getting a new mortgage in today's tight lending climate isn't fun or easy. If your existing lender doesn't offer streamlined refinancing programs it can be a time-consuming process, and if the monthly savings are small, or the benefits take too long to realize, the costs of refinancing might outweigh the benefits.

6. Term extension: If you've already refinanced and shortened the term of your loan, you could be forced to get a longer term loan if you refinance. Typically, the shortest fixed-rate mortgage term is 10 years. If you have less than that remaining on your loan, the only way to ensure savings is to refinance the fixed-term loan and then make prepayments to preserve your remaining term.

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  • Keith Gumbinger of HSH.com is a 25-year expert observer of the mortgage and consumer debt markets. He has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS, and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.