Refinancing is becoming more and more popular thanks to today’s low rates. It’s not surprising, seeing as how it can be a great ally in the war against financial troubles. However, sometimes people choose to refinance for the wrong reasons and end up hurting themselves. This article will give you some examples of bad reasons to refinance your mortgage, so that you can avoid them.
1. Refinancing to consolidate debt
Consolidating debt can be a good idea. After all, you take all your high interest debt and replace it with a low interest one. However, when you use a mortgage to do it, you replace unsecured debt (such as credit card debt) with debt that is backed by your home. If something happens and you are unable to make the monthly payments, you can lose your house. Not paying your credit cards comes with many negative consequences, but they’re nowhere near as bad as this one.
2. Refinancing to transform and ARM into a fixed-rate loan
You can never predict how rates are going to go. That’s why it’s always a good move to chance your adjustable-rate mortgage into one with a fixed-rate. However, it’s never a good idea to just jump without looking. That’s why it’s important to take a look at your ARM and make sure that you know what index it is tied to, how often your loan adjusts and your caps on the loan adjustments. Changing to a fixed-rate loan could be a good move, but it’s still better to check before you sign anything. Otherwise, you might lose money.
3. Refinancing to reduce your payments
For most people, this is the main reason for refinancing. Reducing your monthly payments by lowering your interest rate makes financial sense. But refinancing isn’t free, and, unfortunately, many people forget this.
The closing costs and fees that come with refinancing can cost you a lot. So, if you want to save money, you need to factor these extra costs into your calculations. Don’t be afraid to use a mortgage calculator.
4. Refinancing to a longer term loan
You can save money each month if you refinance into a mortgage with a lower interest rate. However, don’t forget about the overall cost of your loan. If you have just a few years left on your mortgage and you refinance to a 30-year loan, you’ll end up paying more over the entire duration of the new loan.
Unless it’s absolutely necessary, you should avoid doing this. Don’t underestimate the benefits of a debt-free life.
5. Refinancing to take cash out for investments
If you’re responsible, disciplined and have experience handling money, this move can be a good option. Otherwise, it’s better not to play with your home’s equity. Don’t forget that cash is easy to spend. And, once it’s gone, it’s gone.
6. Refinancing to buy a new home
It’s never a good idea to refinance if you plan to move. If you want to sell your home in the near future, first see if you can pass the break-even point on the new loan. Only then can you save money. Otherwise, you’d just be throwing money away on refinancing.
There are bad reasons to refinance your mortgage, just as there are good reasons to do it. This is a fact, and it shouldn’t scare you away from refinancing. Do your homework, be smart about it and act responsibly, and you will be able take advantage of all the benefits that come with refinancing, while avoiding all the unpleasant things.