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Refinancing a home’s mortgage is a shiny option that homeowners have to tap into the equity that they have built up in their house, or to renegotiate the terms of their mortgage so that interest rates and monthly payments are significantly lower. However, while refinancing can look like an attractive option in the short-term, it is important to look down the road and consider the risks that could lead to a worse financial situation in the long-run. 

Here are some examples of a time where you should reconsider refinancing your home…

You’re Not in a Long-Term Home

If you’re thinking of moving in the near future, then refinancing is almost assuredly not the best option for you. The people who should really consider refinancing are the people who are planning to stay in the same home for decades, and who have already been there for a significant amount of time to put the equity into the home. This is because it takes time for the savings on your monthly payments to catch up to the upfront closing costs of refinancing.

You’re Unable to Cover the Closing Costs

In order to refinance your home, you need to pony up a chunk of money to cover the closing costs. Generally, this is 2-5% of the remaining mortgage. If you can’t cover those closing costs, you probably shouldn’t even consider refinancing, because the only alternative is to include the amount of those closing costs into the new loan, which means that it will only grow over time, due to interest. Likewise, the added amount of the closing costs will take a chunk out of the equity that you’ve earned, and will also reduce the savings per month on your new mortgage payment.

You Have Shaky Credit

One of the major benefits of refinancing is that you get to pay a lower interest rate (although a new mortgage with a longer-term might result in paying more in interest over time, but that’s a different matter). If you have poor credit, then you will find that the only lenders who will be willing to give you a loan for refinancing will not be willing to give you much of a lower interest rate. If you are thinking of refinancing, take a year or so to try to repair your credit, somewhat, and then try again. In the long-run, this will be more financially feasible.