How Refinancing Can Hurt You Financially

Q: Gerald, I heard interest rates are probably going to go up.  Before they do, I’m thinking we should refinance again.  Mortgage rates are lower now than they were when we last refinanced.  Do you think we should refinance again now? Doug, Hempstead, NY

A: Hi Doug.  First of all, let’s define what “refinancing” really means.  Refinancing a mortgage is not free, it’s a service that lenders charge you money for.  When you refinance a mortgage, normally you are paying a lender a fee or a set of fees to lend you money against equity you have in your property.

There’s a difference between spending and saving.  Saving is the opposite of spending.  If you go shopping and buy stuff that’s 50% off the retail price, you are still spending not saving despite the fact that the store may tell you that you are saving 50%– you are in fact spending whatever you end up paying for the stuff you buy.  Likewise, the act of refinancing is spending not saving, although it may result in saving over time if you refinance a mortgage at a lower interest rate after you recoup the cost of refinancing because of a reduction in the overall interest you pay.

Refinancing can hurt you financially in a number of ways: 1) If you refinance over and over–every time you refinance, it costs you more money-money that you either have to pay upfront or that you have to pay over the life of your loan 2) If you sell your home soon after you refinance before you recoup the cost of refinancing, you’ve effectively lost money by refinancing.

I’m not saying it doesn’t make sense to refinance, particularly if you don’t refinance too often and if you plan to own the property for a long time.  However, you have to weigh the actual costs of refinancing versus the financial benefits with respect to lower monthly payments, lower interest costs and potential tax write-offs.

Thanks for your question, Doug.  Good luck.

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