Yahoo Finance Rachel Cruze: 3 Times You Should Avoid Refinancing a Loan
Debt payments and interest are a big deal when you’re struggling — and people are struggling right now. According to a late 2023 report from Ramsey Solutions, 54% of Americans are worried about paying basic expenses. Over 40% struggle to keep up with mortgage payments.
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In a recent YouTube video, money expert Rachel Cruze outlined three scenarios when you should say “no” to refinancing. Here’s a look at each, including the money math involved.
What Is a Refinance?
A refinance replaces your loan agreement with a new one. You still owe the same amount — unless you withdraw from your balance or make a lump-sum payment as part of the refinance. Those are called cash-out and cash-in refinances.
If your balance doesn’t change, there are three main differences in a refinanced loan:
A new interest rate: Your lender will calculate your interest rate based on current market conditions and your finances.
New terms and conditions: You might choose a different term length. For example, some people refinance a 30-year to a 15-year mortgage to pay it off sooner. The lender might also change other loan rules.
A different monthly payment: Since your terms and interest rate change, you’ll pay a different amount each month.
People often refinance when mortgage rates drop significantly, as many did in the fourth quarter of 2023. However, even if you can get a lower rate, there are some situations when Cruze advises against refinancing.
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Scenario No. 1: You’re Consolidating Debt
Many people refinance to bring multiple debts under one umbrella. This process is called consolidation, and it can be a tempting choice — you get approved to refinance your mortgage to a lower rate. That rate is lower than what you pay on your car and personal loans, so you add those amounts to the new mortgage.
You now have a lower interest rate across all your debts. At first glance, it seems you’ll accrue less interest and save over the long run — but Cruze invites you to look closer.
It will take longer to pay off your debts if you consolidate them into a larger loan. Instead, Cruze recommended the “debt snowball” method, which challenges you to pay off smaller balances first. Cruze and Ramsey Solutions note that paying off smaller loans first is more motivating. Plus, paying off a debt erases it, so it generates zero interest, not less.
Scenario No. 2: Closing Costs Will Exceed Your Savings
According to Freddie Mac, the average cost of refinancing is around $5,000. That includes:
Appraisal fees
Credit report fees
Lender origination fees
Underwriting fees
Government recording costs.
Depending on the size of your loan and the interest rate you receive, those costs might exceed what you’d save in interest over the new loan’s lifetime. A mortgage calculator like Zillow’s can help you calculate your accumulated interest due. Compare that number to the output of a refinancing cost calculator, such as US Bank’s.
Scenario No. 3: You Might Move Soon
Mortgages aren’t the only type of debt you can refinance, but they are the largest loan most Americans will owe. As of the second quarter of 2023, the average mortgage debt nationwide was $241,815. Mortgages are also the only type of debt Cruze recommends, which is why her three rules are mortgage focused.
Cruze’s third rule applies exclusively to mortgages. She warned that a refinance usually costs more than you save if you don’t plan to stay in your house long term.
As you’ve learned, refinance closing costs can be high. If you move in a few years, you’ll need a new mortgage with additional expenses. According to the National Association of Realtors, closing costs range from 1.2% to 2.47% of a home’s value — averaging more than $8,000 in some states and above $6,000 in most.
It’s hard to justify paying both sets of closing costs, Cruze said.
Is Refinancing Right for You?
Refinancing is a personal decision, and doing the math is essential. There are a lot of numbers involved, but an online refinance calculator can help. Kemba Financial Credit Union offers a comprehensive tool that considers multiple relevant factors, including your home’s value and how long you plan to stay. Crunch the numbers to decide what works best for you.
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This article originally appeared on GOBankingRates.com: Rachel Cruze: 3 Times You Should Avoid Refinancing a Loan
