News & Trending Mortgage & Loans News

9 Reasons You Shouldn't Refinance Your Loans, Despite the Major Rate Cuts

Although interest rates are dropping, it might not be time for you to search for a new loan.

businesswoman signing contract
Updated Oct. 8, 2024
Fact checked

We receive compensation from the products and services mentioned in this story, but the opinions are the author's own. Compensation may impact where offers appear. We have not included all available products or offers. Learn more about how we make money and our editorial policies.

In September, America’s central bank — the Federal Reserve — finally began to lower its target federal funds rate. This move came after a couple of years of climbing rates.

With rates now sinking, you might think it’s the perfect time to refinance your loans. In some cases, refinancing to a lower rate can indeed help you get ahead financially.

However, while it’s tempting to look for a lower rate, refinancing isn’t always the right financial decision. Here are some situations when refinancing might not make sense.

If you’re over 50, take advantage of massive discounts and financial resources

Over 50? Join AARP today — because if you’re not a member you could be missing out on huge perks. When you start your membership today, you can get discounts on things like travel, meal deliveries, eyeglasses, prescriptions that aren’t covered by insurance and more.

How to become a member today:

  • Go here, select your free gift, and click “Join Today”
  • Create your account (important!) by answering a few simple questions
  • Start enjoying your discounts and perks!

Important: Start your membership by creating an account here and filling in all of the information (Do not skip this step!) Doing so will allow you to take up 25% off your AARP membership, making it just $12 per year with auto-renewal.

Become an AARP member now

You already have a great rate

Monster Ztudio/Adobe percentage icon and arrow symbol on wooden cube

If you already have an amazing rate attached to a loan, refinancing now might not be one of the wisest homeowner moves or car owner moves you can make.

For example, homeowners who locked in historically low rates in the range of 3% likely won’t find a lender offering lower rates than that.

Your credit score is not the best

Who is Danny/Adobe man checking credit score using laptop

If your credit score is less than ideal, you likely won’t qualify for the best rates available from lenders. That means you might not find a better rate for your loan.

Before jumping into a refinance, consider spending the time to improve your credit score by making on-time payments, reducing your borrowing, and taking other steps.

After your credit score improves, you should have access to more attractive opportunities for home, auto, and other types of loans.

You will owe a prepayment penalty

successphoto/Adobe working with calculator

If your existing loan has a prepayment penalty attached, the extra cost could offset the benefits of refinancing.

Read the fine print of your loan documents to determine whether or not you would owe a prepayment penalty for paying off a loan early.

It’s still possible that the benefits of refinancing will outweigh the prepayment penalty. You will need to run the numbers to find out.

Resolve $10,000 or more of your debt

Credit card debt is suffocating. It constantly weighs on your mind and controls every choice you make. You can end up emotionally and even physically drained from it. And even though you make regular payments, it feels like you can never make any progress because of the interest.

National Debt Relief could help you resolve your credit card debt with an affordable plan that works for you. Just tell them your situation, then find out your debt relief options.1

How to get National Debt Relief to help you resolve your debt: Sign up for a free debt assessment here. (Do not skip this step!) By signing up for a free assessment, National Debt Relief can assist you in settling your debt, but only if you schedule the assessment.

Try it

It will take too long to break even

Daenin/Adobe real estate agent

When you refinance a mortgage, you should expect to pay significant closing costs. Generally, closing costs range from 2% to 6% of the loan amount.

Although a refinance might get you a lower monthly payment, it could take months or years to recoup your closing costs in savings. If you plan to move before that break-even point, refinancing might not make sense.

The new payments would be too high

Arto/Adobe stress over credit card's bill

When refinancing a loan, you have an opportunity to shorten your repayment term or potentially tap into your equity through a cash-out refinance.

While either of these options could help you meet financial goals, both typically involve taking on a higher monthly payment.

In some cases, the higher monthly payment won’t fit into your budget. Make sure to consider how the new monthly payment would impact your finances before refinancing.

You can't afford the closing costs

Vitalii Vodolazskyi/Adobe Documents for closing costs and keys

Closing costs can add up quickly for any mortgage refinance, increasing your bill by thousands of dollars.

If you don’t have the cash to cover closing costs, refinancing might not make sense for your situation.

You might owe other fees

SUPREEYA-ANON/Adobe paper currency in wallet

Some loans might require you to pay additional fees after the refinance. For example, if you refinance a car, you might have to pay to re-register the vehicle. Or, you might face a prepayment penalty to satisfy your original lender.

Before you apply for a refinance, read the details of your current loan to confirm you won’t pay extra fees when making the switch.

You might just end up paying more

Mymemo/Adobe online shopping

If you refinance your loan into a longer term, you could end up paying more in interest overall. In that case, refinancing could ultimately be a setback for your finances.

Run the numbers to find out if you would pay more for the loan when you refinance to a longer term. In some cases, you might decide that refinancing isn’t worth it.

You might lose borrower protections

Brian Jackson/Adobe saving for education

If you have federal student loans, borrower protections may be built into your repayment period. For example, some federal student loan borrowers qualify for forgiveness programs.

Additionally, many borrowers can tap into income-driven repayment plans, which allow you to snag a monthly payment that better suits your budget.

If you refinance to a private student loan, you will lose access to federal borrower protections. For many, losing access to these borrower protections makes a refinance a bad option.

Earn cash back on everyday purchases with this rare account

Want to earn cash back on your everyday purchases without using a credit card? With the Discover®️ Cashback Debit Checking account (member FDIC), you can earn 1% cash back on up to $3,000 in debit card purchases each month!2

With no credit check to apply and no monthly fees to worry about, you can earn nearly passive income on purchases you’re making anyway — up to an extra $360 a year!

This rare checking account has other great perks too, like access to your paycheck up to 2 days early with Early Pay, no minimum deposit or monthly balance requirements, over 60K fee-free ATMs, and the ability to add cash to your account at Walmart stores nationwide.

Don’t leave money on the table — it only takes minutes to apply and it won’t impact your credit score.

Apply for a Discover Cashback Checking account today

Bottom line

chaylek/Adobe interest rates and dividends

Lower rates might make refinancing a good option. But even with dropping rates, refinancing isn’t necessarily the right choice for everyone.

For example, if you want to get out of debt fast, covering closing costs could actually slow down your debt-busting efforts.

Make sure to run the numbers for your unique situation to determine if refinancing your loan is the best way to move forward.

Lucrative, Flat-Rate Cash Rewards

5.0
info

Wells Fargo Active Cash® Card

Current Offer

$200 cash rewards bonus after spending $500 in purchases in the first 3 months

Annual Fee

$0

Rewards Rate

Earn unlimited 2% cash rewards on purchases

Benefits and Drawbacks
Card Details