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With interest rates trending downward for many months, refinancing is all the rage — but it’s not always the best choice. Here are five bad reasons to refinance.
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 backed 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 be a way of enabling 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 just 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 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 advantage of a no-cost refinance
A lender might offer to refinance a mortgage with no closing costs, but these fees will actually be added to the loan in the form of higher interest payments. Alternatively, the closing costs may be rolled into the mortgage, which means the borrower will be paying interest on these payments throughout the life of the loan.
If none of these reason fit your situation, you may be ready to refinance your home. Check out our options!
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