The Disadvantages Of Refinancing Your Home Loan Will Make You Think Twice

The average American mortgage is 30 years long, but most homeowners move or refinance long before that term is done. In some cases, refinancing can seem like an easy win, such as when interest rates are low. But according to Jarek Tadla, a seasoned real estate investor, passionate advocate for mental health awareness, and author of "Not Enoughness: The Gift and the Curse," it also has disadvantages to keep in mind, especially if you don't do your research. 

If you follow the steps to refinance your mortgage, you will essentially be trading in the current home loan for a new one. One of the most common reasons for refinancing is to "secure a lower interest rate, which can reduce monthly payments and the total interest paid over the life of the loan," Tadla said in an exclusive interview with House Digest. He says it can also be a way to consolidate debt, leverage home equity to pay off expenses, or switch to a shorter loan term to pay off your mortgage early.

These are worthwhile potential benefits — refinancing is sometimes the only way that homeowners can pay for costly home repairs, for example. But refinancing also has costs of its own, including extra upfront fees. There are important questions to ask before refinancing your mortgage if you want to avoid problems down the line.

The most prominent disadvantage of refinancing is that it comes with extra upfront costs just like any mortgage (but without a new house to go with it). "First, there are often substantial closing costs, including appraisal fees, origination fees, and other related expenses, which may offset any potential savings," Jarek Tadla shared exclusively with House Digest. "Not to mention, the process of refinancing involves a credit check, which can temporarily lower your credit score."

Second, while you can refinance to lower your interest rate, you could also end up in the opposite situation if you're not careful. Tadla said this is a risk when switching from one adjustable-rate mortgage (ARM) to another, "as future rate increases could significantly raise your payments," he explained. Similarly, if you refinance to a longer loan term, your monthly payments may be shorter, but you will end up paying more interest over the length of the loan.

While refinancing costs money upfront, it can eventually even out in the end and save you money long-term. But you'll have to do your own legwork to determine how long that would take in your situation and whether it's worth it. Jarek Tadla's exclusive recommendation to House Digest is "research, research, research."

In addition to calculating how long it will take for the savings made via refinancing to cover the costs involved, Tadla also advised looking at market trends such as projected interest rates, which can help you decide if it's better to keep your current mortgage or wait before taking the plunge. Also, take your personal financial goals into account, whether that's paying off debt or reaching another milestone, and see whether refinancing could help you achieve that. "It's also essential to consider long-term plans, such as how long they plan to stay in the home, as refinancing may not be worthwhile for those planning to move soon," Tadla said. On average, homeowners only live in one place for eight years, so refinancing may not be the best option for everyone.