6 Bad reasons to refinance your home
For many homeowners, refinancing an existing mortgage to a home loan with an interest rate that’s at least a full point lower than their current rate, can hack hundreds of dollars off their monthly payment. This can easily add up to tens of thousands of dollars in saved interest paid over the life of the loan.
However, refinancing is not always a good idea. Here are six bad reasons to refinance a home loan.
1. To extend the term of the loan
Homeowners who are more than halfway through their 30-year mortgage will likely not benefit from a refinance. Stretching the remaining payments over a new 30-year loan will mean paying more in overall interest, even with a lower interest rate.
2. To consolidate debt
Refinancing a home loan to consolidate debt can be an irresponsible move with devastating consequences. Mortgages are secured debt, backed by the borrower’s home. Credit card debt, though, is unsecured. Transferring unsecured debt to a loan that is supported by a home means the borrower can stand to lose their house if they default on the debt.
Refinancing a mortgage to consolidate debt can also enable bad financial habits that got the borrower into debt in the first place.
3. To save money for a new home
A refinance will cost money, generally 2-4% of the entire loan. It can take several years to break even on a refinance. If the borrower is planning to move before then, the refinance will not save them any money.
4. To splurge on an expensive purchase
Some homeowners opt for a cash-out refinance to get their hands on cash for an expensive purchase. This cash is not recommended for many reasons.
First, the loan isn’t cheap. Closing costs can be thousands of dollars, and if the new loan is more than 80% of the home’s value, the homeowner will also need to pay private mortgage insurance.
Second, using a home’s equity for an expensive purchase means the borrower will see little or no return on their money. Financial experts caution against using home equity for anything that will not improve the owner’s finances.
5. To take cash out for investing
Refinancing a mortgage with plans to use the extra cash each month for investing is, generally, not a responsible choice. Cash is easily spent and it takes tremendous discipline to actually invest the money that is saved from a refinance. Also, paying off a mortgage toward a house can actually be a better long-term investment than pouring money into a risky stock.
6. To take advantage of a no-cost refinance
A lender might offer to refinance a mortgage with no closing costs, but the fees add to the loan in the form of higher interest payments. Alternatively, the closing costs find their way into the mortgage, which means the borrower will be paying interest on these payments throughout the loan’s life.
Now you know what the 6 bad reasons to refinance your home, you are more prepared to make better decisions. If you want to refinance your home, we can help. If you need a personal loan or even some budget counseling we can help with that too! Where ever you are in your financial journey, we are here to help.