Just as there are optimal times to refinance your home, there are also times when you should not consider refinancing.  In our look at Refinancing, Part 2 covers the situations where you should hold off refinancing.

1. You have had your mortgage a long time

The amortization chart shows that 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.

Amortization of a $200,000 loan for 30 years at 5.9%

2. Your current mortgage has a prepayment charge

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.

3. 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–calculate how long it will take to break even if you do refinance.  This will help you determine whether it is worthwhile to refinance, if you are planning to move in the near future. (see below)

How do you calculate the break-even period?

Use the step-by-step worksheet below to give you a ballpark estimate of the time it will take to recover your refinancing costs before you benefit from a lower mortgage rate. The example assumes a $200,000, 30-year fixed-rate mortgage at 5% and a current loan at 6%. The fees for the new loan are $2,500, paid in cash at closing.