What are the negatives of refinancing your house? (2024)

What are the negatives of refinancing your house?

Mortgage refinancing is not always the best idea, even when mortgage rates are low and friends and colleagues are talking about who snagged the lowest interest rate. This is because refinancing a mortgage can be time-consuming, expensive at closing, and will result in the lender pulling your credit score.

If you opt to have the closing costs rolled into the new mortgage, you're increasing the mortgage balance — the amount you owe — and thus decreasing your equity — the amount you own. Similarly, a cash-out refinance can impact your home equity.

Refinancing allows you to lengthen your loan term if you're having trouble making your payments. The downsides are that you'll be paying off your mortgage longer and you'll pay more in interest over time.

Refinancing doesn't have to put a dent in your home's equity, but there are factors that can. Lender fees, closing costs and changes in your home's market value could positively or negatively affect your home's equity over time.

How much cash can you receive through cash-out refinance? With a conventional cash-out refinance, you can typically borrow up to 80% of your home's value—meaning you must maintain at least 20% equity in your home. But if you opt for a VA cash-out refinance, you might be able to access up to 100% of your home's value.

Move into a longer-term loan: If you're already at least halfway through the loan term, refinancing generally isn't a good idea.

A cash-out refinance is a type of mortgage refinance that takes advantage of the equity you've built over time and gives you cash in exchange for taking on a larger mortgage. In other words, with a cash-out refinance, you borrow more than you owe on your mortgage and pocket the difference.

However, not having enough equity in your home can make refinancing risky, especially if you do plan to take out home equity loans. Most lenders want you to have a reasonably low loan-to-value (LTV) ratio before they'll consider refinancing your mortgage.

If your goal is to get a lower interest rate, right now isn't the best time to refinance. You're likely to end up with a higher rate, plus you'll need to pay closing costs on your new mortgage. If you can hold off, mortgage rates are expected to slowly trend down over the next couple of years.

Do you pay more interest when you refinance?

You could save by changing your home loan's term

You can also refinance to a longer term. That can lower your monthly payments, because you're paying over more time. But you're also paying more interest because you've extended the life of the loan.

In a no-closing-cost refinance, the borrower doesn't pay for these expenses upfront, but rather over time. This could be by one of two methods: The closing costs are rolled into the new loan, increasing the balance; or you'll pay a higher interest rate. Many lenders offer no-closing-cost refinances.

To potentially reduce some of the closing costs of a refinance, ask for closing costs to be waived. The bank or mortgage lender may be willing to waive some of the fees, or even pay them for you, to keep you as a customer.

HELOCs are generally the cheapest type of loan because you pay interest only on what you actually borrow. There are also no closing costs. You just have to be sure that you can repay the entire balance by the time that the repayment period expires.

Your servicer wants to refinance your mortgage for two reasons: 1) to make money; and 2) to avoid you leaving their servicing portfolio for another lender. Some servicers will offer lower interest rates to entice their existing customers to refinance with them, just as you might expect.

Legally, there isn't a limit on how many times you can refinance your home loan. However, mortgage lenders do have a few mortgage refinance requirements you'll need to meet each time you apply for a loan, and some special considerations are important to note if you want a cash-out refinance.

Minimum 620 credit score

Conventional cash-out refinance guidelines require a 620 score. Meanwhile, the VA doesn't set a minimum score standard, although many lenders also set theirs at 620. FHA loans are the exception: Borrowers may qualify with scores as low as 500.

If you want to refinance, no down payment is needed. Still, it does not mean that you won't have to pay anything to refinance your mortgage. You will have to pay closing costs that typically add up to about 2 to 5 percent of the loan amount. Get Your Refi Quote See How Easy it is to Get Your Custom Rate!

No, the proceeds from your cash-out refinance are not taxable. The money you receive from your cash-out refinance is essentially a loan you are taking out against your home's equity. Loan proceeds from a HELOC, home equity loan, cash-out refinance and other types of loans are not considered income.

Mortgage refinance rates are currently at their lowest since spring 2023, and they should keep falling in 2024. If you got your mortgage before 2023, your current rate might still be lower than if you locked in a new rate by refinancing now.

What is the interest rate today?

As of May 2023, the average rate for a cash-out refinance ranges between 5% and 7%, but you may be able to score a better deal by comparing options from several different lenders.

How much can you borrow with a home equity loan? A home equity loan generally allows you to borrow around 80% to 85% of your home's value, minus what you owe on your mortgage. Some lenders allow you to borrow significantly more — even as much as 100% in some instances.

Determining equity is simple. Take your home's value, and then subtract all amounts that are owed on that property. The difference is the amount of equity you have.