3 Reasons Not to Refinance Your Mortgage Right Now

It may not be the best time to refinance for a few key reasons.

The mortgage you sign when you first buy a home isn't necessarily the mortgage you're stuck with until your home is paid off. There's always the option to refinance your loan and snag a new one with terms that are more favorable to you.

During the pandemic, many borrowers have refinanced their mortgages, largely to take advantage of lower interest rates. But is refinancing a wise move right now? Here are three reasons why it may not be.

1. Rates have increased

The mortgage rates we're seeing during the first quarter of 2022 are higher than the rates we saw at any point in 2021. And since refinance rates tend to be a little bit higher than the rates you'll see available for purchase mortgages, it means that if you get a new home loan now, you may not enjoy as much savings as expected.

As of this writing, the average 30-year refinance rate is 4.12%. But if your current mortgage rate is 4.25%, that's not going to result in a lot of savings.

When you refinance a mortgage, you're charged closing costs to put that new loan into place. Closings costs commonly amount to 2% to 5% of your loan amount, so if you're charged $5,000 in closing costs but only manage to shave $40 a month off your current loan payments, that's not a move that makes sense. In this case, it will take you 125 months, or more than 10 years, just to break even. You may not even end up staying in your home that long.

2. Your credit score just took a hit

The higher your credit score, the lower an interest rate you're likely to snag on a mortgage refinance. But if your credit score recently dropped, then it doesn't pay to put in that application.

A lot of people have seen their bills rise in recent months due to inflation. If that's caused you to rack up debt and lower your credit score, then you may not be in the best position to apply to refinance.

3. Your long-term plans aren't certain

As mentioned, refinancing isn't free. Rather, lenders impose closing costs to swap an existing home loan for a new one. If you're not sure whether you'll be staying in your home for several years, then it pays to hold off on refinancing.

These days, a lot of people are trying to figure out their plans in light of remote work -- or the fact that it's starting to come to an end. Plus, a lot of people are resigning from their jobs and pursuing better offers. If you're in the process of doing either, it could pay to hold off on locking yourself into a new mortgage until you're sure what your living situation will look like over the next few years.

While refinancing could work to your benefit, now may not be the best time to trade in your existing mortgage for a new one. Ultimately, you'll need to consider your personal circumstances and run the numbers to see if a refinance makes sense.