When Refinancing Costs More Than It Saves: A Warning to Homeowners

written by

Jim Mucci

posted on

November 22, 2024

Thinking about getting a new home loan? Be careful – it could cost you more money than it saves. Getting a new loan costs between $2,000 and $6,000. While a lower rate sounds good, those costs eat into your savings.

You need to stay in your home long enough to make back what you spent. Most people need 2-3 years to break even. Many folks make simple mistakes. They only look at the new rate. They forget about all the fees. They switch when the rate drop is too small. Or they have too much other debt.

Take your time. Look at all your costs. Make sure a new loan will truly help you save money. Your wallet will thank you.

Understanding Mortgage Refinancing Basics

Getting a new home loan to replace your old one is called refinancing. Most people do this to save money or get better loan terms.

You need to show you can pay back the loan. The bank will look at:

Your credit score
Your bills and income
How much of your house you own

Refinancing costs money. You pay fees for:

Filing papers
Having someone check your house value
Looking up home records
Final paperwork

These costs are about $2 to $6 for every $100 you borrow.

Before you refinance, find out how long it will take for your savings to cover these costs. Think about how long you want to live in your home.

Also think about why you want to refinance – to pay less each month, pay off your loan faster, or get cash from your home's value.

Hidden Costs of Refinancing

When you get a new home loan, you need to know about costs you mightn't see right away. Just like buying new shoes, you have to pay for more than what's on the price tag.

You will need to pay for someone to check your home's worth ($300-$700). You also need to pay for papers that show you own the home ($700-$900). A small fee checks if you pay your bills on time ($30-$50). Your old bank may ask for money if you pay off your loan early.

You might need to pay more taxes on your home. You may also need to pay for flood papers ($15-$25) and a lawyer ($500-$1,000).

The bank will want money to make your new loan – about 1 penny for each dollar you want to borrow.

All these costs add up fast. The money you save from a better loan rate mightn't be as much as you think once you pay for all these things.

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Break-Even Point Analysis

Let's talk about getting your money back when you change your home loan.

When you get a new loan, you spend money up front. You need to know how long it will take to get that money back from your savings. We call this the break-even point.

Here's a simple way to find your break-even point:

Add up all your new loan costs
Look at how much you save each month
Divide your costs by your monthly savings

For example:

If you spend $4,000 on a new loan

And save $200 each month

You will get your money back in 20 months.

Write down your costs and savings in a list. This helps you see when you'll start saving real money.

Think about how long you want to stay in your home. If you plan to move before you get your money back, getting a new loan mightn't help you save money.

Common Refinancing Mistakes

You want to save money when getting a new home loan. Take time to look at rates from many banks. Don't just pick the first one you see.

Many people only look at the interest rate and miss other big costs. These costs can be things like home checks, paperwork fees, and bank fees.

Make sure the new rate is at least 0.5% lower than your old one. If not, the costs might be more than what you save.

Look at both what you pay now and what you'll save later.

Not Shopping Multiple Lenders

Getting a new home loan? Don't take the first offer you see. That's like buying the first car you look at – you might miss a better deal!

Talk to at least three banks about their home loans. Do this within two weeks so it won't hurt your credit score too much. Each bank will give you a different price and deal.

Look at all the costs – not just the rate they show you. Ask about fees and closing costs too.

Banks want you to pick them, so use this to your advantage. If one bank gives you a good price, show it to another bank. They might give you an even better deal!

Remember: This is your money. Take time to shop around and save more of it.

Ignoring Total Closing Costs

When you want to get a new home loan, don't just look at the rates. You need to look at all the costs too. These extra costs can eat into your savings if you're not careful.

Here's what you'll need to pay for:

Fees to apply for the loan and start the process
Fees to check who owns the home and protect your rights
Fees to find out what your home is worth now
Money for taxes and home insurance

To know if getting a new loan is worth it, do this simple math: Take all the costs and divide them by how much you save each month. This tells you how many months it will take to make back the money you spent.

For example, if your costs are $3,000 and you save $100 each month, it will take 30 months to break even.

Remember: Look at all costs, not just the rate. This helps you make a smart choice about your home loan.

Chasing Minimal Rate Drops

Think of your home loan like a puzzle. Many people get excited when interest rates drop just a tiny bit. They rush to get a new loan, but this can be a costly mistake.

When you get a new loan, you have to pay fees. These fees are like a big bill you must pay up front. You need to make sure your monthly savings are worth these costs.

If rates drop just a little bit (like 0.25%), it's often not worth getting a new loan. The fees will eat up your savings. You should wait until rates drop more (about 1% lower).

Getting a new loan costs a lot – between $2,000 and $6,000 for every $100,000 you borrow. If you plan to move in the next five years, even a better rate mightn't save you money in the end.

Before you jump at a new loan, do the math. Make sure the savings are big enough to make it worth your time and money.

Closing Cost Considerations

Getting a new home loan comes with costs you need to pay upfront. These costs are usually 2% to 6% of your new loan amount.

You will need to pay different fees when you get your new loan:

The bank will charge you $2,000 to $3,000 to set up your loan
You'll pay $700 to $900 to check who owns the home and get insurance
Someone will look at your home to set its value – this costs $300 to $600
Your city or town will charge $25 to $300 to record your new loan

To know if getting a new loan is worth it, do this simple math: Take all the costs you pay now and divide them by how much you save each month. This tells you how many months it will take to make back the money you spent.

For example, if you spend $3,000 on costs and save $100 each month, it will take 30 months to break even.

Long-Term Financial Impact

Money decisions today can change your future. Think about how a new home loan will affect you years from now.

First, look at how much you'll save each month. Then check how much the new loan costs to set up. If you divide these costs by your monthly savings, you'll know how long it takes to start saving real money.

If you plan to move before you start saving real money, getting a new loan isn't a good idea. Your new loan also changes how fast you own more of your home.

Look at your monthly bills and income. A new loan can give you more or less money to spend each month.

This matters when you want to save for old age or when surprise costs pop up.

Interest Rate Reality Check

Let's look at if getting a new home loan makes sense for you.

Think about what you'll pay now versus later. You need to:

Find out what your new monthly payment would be
Add up all the costs to switch loans
See how many months it will take to save enough to cover those costs

Rates go up and down a lot these days.

Make sure the new rate saves you enough money to make the switch worth it.

Ask yourself: How long will I stay in my home?

Will I save enough each month to make up for what I spend on fees?

Rate Vs Overall Costs

When you want a new home loan, don't just look at the interest rate. Many people get excited about low rates but forget about other costs.

Think about:

Money you pay at closing time
How long it takes to save enough to cover these costs
Extra fees to get a lower rate
How changing your loan time affects what you pay

Before you get a new loan, add up all the costs. Look at what you pay now and what you'll pay later. This way, you'll know if getting a new loan really saves you money.

Make sure to look at the whole picture. A low rate might look good, but the total cost is what matters most. Take your time to check all the numbers before you decide.

Today's Market Conditions

Let's talk about home loans and their costs today.

Right now, you'd pay about 6.8% interest on a 30-year home loan. This is much more than the very low 2.65% rate people got in early 2021. Banks charge more now because the Fed made them do it.

If you got your home loan in 2020 or 2021, you might be paying less than 3.5% interest. If so, getting a new loan now would cost you more money.

But if you pay more than 8% on your current loan, today's rates could help you save money. Just know that a new loan means starting over with 30 years of payments.

Breaking Even Analysis

When you want to know if getting a new home loan is worth it, you need to do some simple math. Take what it costs to get the new loan and divide it by how much you save each month. This tells you how many months until you get your money back.

Think about these things:

Will your new payment save you enough money?
How many years will you live in your home?
Will you pay more in the long run?
Will your tax bill change?

If you plan to move soon, a new loan mightn't help you save money.

Most people should get their money back in about 2-3 years. If it takes longer than that, it may not be a good choice.

Home Equity Factors

Your home's value is like a piggy bank that grows over time. Let me tell you how it helps when you want a new home loan.

When you own more of your home, you can get better deals. Think of it like this – if you own 20% or more of your home, banks will give you nicer loan rates.

Banks want to make sure they don't lose money. If you own less than 20% of your home, you'll need to buy extra insurance. This makes your monthly bill bigger.

You can also use your home's value like a big wallet. If you've paid off a lot of your home, you can get money out of it.

But remember – taking money out means you'll have to pay more each month.

Credit Score Requirements

Getting a new home loan depends a lot on your credit score. This number shows how well you pay your bills. You need at least a 620 score, but a 740 or higher gets you the best deals.

Your score affects what you pay:

Bad scores under 700 mean you pay more each month
If your score is under 680, you must buy extra insurance
Scores below 660 mean you pay more fees
With scores under 640, you need more papers to prove you can pay

Look at your credit report three months before you ask for a new loan. Fix any wrong items. Make your score better. This can save you lots of money over time.

Timing Your Refinance Decision

When you want to get a new mortgage, think about more than just the lower rates. You need to look at a few key things.

First, think about how long you'll live in your home. You pay fees to get a new loan. Make sure you stay long enough to save more money than you spend on fees.

Watch rate changes but don't try to find the perfect rate. When you see a good rate, take it. Rates can go up fast.

Wait at least six months after you get your first loan before you try to get a new one. Most banks need you to wait this long.

Check if you have to pay a fee to end your old loan early. This fee might cost more than what you save.

Pick a time when your credit score is high and you don't have much debt. This helps you get the best deal.

Debt-to-Income Ratio Matters

Let's talk about how much debt you can have when getting a new home loan.

Think about all the money you make each month before taxes. Now think about all the bills you pay each month. When you divide your bills by your pay, you get what banks call your debt-to-income ratio.

Banks want your bills to be less than 43% of your pay. This means if you make $1,000, your bills should be under $430.

When you add up your bills, count:

Your new home payment
Credit card bills
Car payments
School loans
Money you pay for child support

If your bills are too high, you have two choices:

Pay off some of your debt
Find ways to make more money

Remember: The more bills you have, the more banks worry about lending you money. They might make you pay more in interest if they think lending to you is risky.

Loan Term Trade-offs

Let's talk about picking how long you'll pay your home loan. Think of it like this: if you stretch out your payments over more time, you'll pay less each month. But there's a catch! You end up paying way more money over time.

For example, if you borrow $300,000 to buy a house, you have two main choices. You can pay it back over 30 years or 15 years.

If you pick 30 years, each monthly payment will be smaller. But you'll pay $215,609 extra in interest.

If you pick 15 years, your monthly payments will be bigger. But you'll only pay $99,431 extra in interest.

This means the longer payment plan costs more than twice as much in the end!

Longer Term Interest Costs

When you make your loan longer, you pay less money each month but a lot more money over time.

Think of it like this: if you change your 15-year home loan to a 30-year loan, your monthly bill goes down, but you end up paying way more in the long run.

Here's what happens with a longer loan:

You pay extra money in interest for many more years
Your house value grows slower because you pay less on what you owe
You stay in debt longer, which can hurt your plans to stop working
You end up paying much more for your house in total

Before you pick a longer loan, think hard about these costs.

The extra money you might pay can add up to thousands and thousands of dollars.

Paying More Over Time

Stretching out your home loan payments means you'll end up paying a lot more money in the long run. While paying less each month might feel good now, it will cost you big time later.

Let's look at what happens with a $300,000 home loan:

Term Length	Monthly Payment*	Total Interest Paid
15 years	$2,108	$79,440
20 years	$1,687	$124,880
30 years	$1,318	$174,240

Think about this: If you switch from a 15-year loan to a 30-year loan, your monthly bill drops by $790. That sounds nice! But you'll pay $95,000 more in the end. That's a lot of extra money just to have smaller monthly payments.

Before you make your choice, ask yourself: Do I want to pay less now and more later? Or pay more now and save money in the long run?

*When you borrow $300,000 at 4% interest

Market Conditions Assessment

When you think about getting a new home loan, you need to know what's happening in the market.

Just like checking the weather before going outside, you want to check if it's a good time to refinance.

Look at these simple things:

Watch if loan rates are going up or down based on what the Fed says
See how much homes like yours are selling for in your area
Check if the economy is doing well by looking at jobs and prices
Find out how many banks near you offer loans, since more banks mean better deals

Getting a new loan works best when the market helps you save money and your home is worth enough to get the loan you want.

Future Housing Plans

Looking to move? Think about your plans before getting a new home loan.

If you want to sell your home soon, a new loan may cost more than it saves you. It takes time to make back the money you spend on a new loan through lower monthly payments.

And if you want to rent out your home later, this can change what kind of loan you can get.

Take time to think about what you want to do with your home before you decide.

Moving Within Five Years

Think About Your Money When Moving Soon

Planning to move in the next five years? You might want to wait before you get a new home loan. It takes time to make back the money you spend on loan fees through lower monthly payments.

Before you get a new loan, think about:

You need to save more money than you spent on fees before you move
Loan fees cost $2,000 to $5,000 for every $100,000 you borrow
Home prices can go up or down by the time you want to sell
You might've to pay extra fees if you move too soon

Look at how long it will take to save money with a new loan.

Make sure this works with when you plan to move.

Selling Before Break-Even Point

When you get a new home loan, timing matters if you plan to move. You need to stay in your home long enough to make back the money you spent on getting the new loan.

Let's say you paid $6,000 for a new loan that saves you $200 each month. You'd need to live in your home for 30 months to get back what you spent.

Think about your plans before you get a new loan. Ask yourself: