4 Signs that Refinancing Your Mortgage is a Mistake
Refinancing your mortgage is like that old adage about jumping off a bridge – just because your friends are doing it doesn’t mean that you should do it too. While lower interest rates around the country have made refinancing a smart move for many homeowners, there are plenty of scenarios where a refinance can actually hurt more than it helps. So before you schedule an appointment your loan officer, take a minute to think about why exactly you want to alter your home loan. If you find yourself motivated by any of the reasons listed below, then refinancing is probably a big mistake.
1) You want to cash out to consolidate your debt. While it’s true that taking a cash-out refinance on a mortgage can help homeowners consolidate multiple lines of debt, this is an incredibly risky move that can easily come back to haunt you. When you decide to move your unsecured, high-interest debts to a low-interest mortgage, you’re creating a 30-year debt that is now backed by your home. If you fail to make payments on this new debt, you could lose your house in foreclosure – which can leave you much worse off than if you had simply allowed the debts to go into default.
Don’t gamble your home to get yourself out of debt. Pay your loans off intelligently. Create a budget for your household using free personal finance software like Mint and use your monthly disposable income to attack your debts one at a time until they’re all eliminated. It might be hard living for a while, but in the end you’ll be much better off.
2) You can’t afford your monthly payments. If your monthly payments are higher than what you can currently afford, then refinancing might be a bad idea. While it’s true that altering your home loan could lower your payments enough to keep you from going into default, it’s important to remember that such convenience comes at a cost.
Refinancing to lower payments will also extend the term of your loan. As a result, the mortgage will end up costing you significantly more money overall and you’ll be stuck with as many as 30 extra years of payments to make. Consequently, refinancing your mortgage to lower your payments should only be used as a last resort after you’ve exhausted every other option of keeping your loan out of default.
3) You want to get an ARM. Switching from a fixed-rate mortgage to an adjustable rate mortgage (ARM) can be tempting, especially how low ARM interest rates are at the moment. The problem with ARMs, though, is that those great initial interest rates that homeowners receive are anything but permanent.
Unlike a fixed-rate mortgage, which only charges one amount of interest throughout the entire term of the loan, an adjustable rate mortgage fluctuates depending on the market index. One month you might be paying 2.44% interest on your mortgage and the next you could be stuck at 6.10% or higher. As a result, refinancing to an ARM is really only a good idea for a handful of homeowners, such as people who plan on moving soon or anticipate getting a raise in a few years. If you aren’t one of them, then stay away.
4) You want to do a “no cost” refinance. As your high school econ teacher taught you – there’s no such thing as a free lunch. This is especially true when it comes to refinancing your mortgage. Those “no cost” refinances that lenders and brokers offer are really anything but. There are closing costs and fees associated with every refinance, and those need to be paid for by someone.
If a lender offers you “no cost” refinancing then what they’re likely doing is wrapping all of those costs and fees into the loan itself. This results in a less-than-ideal loan that will be more expensive in the long run than a traditional loan where you just handled the closing costs yourself. Don’t buy into the gimmicks – stay away from anything with a “no cost” label.
Modifying your home loan isn’t always a bad idea. In this current economic climate, there are plenty of ways that responsible homeowners can take advantage of a refinance to lower their interest rates or to pay their loan off faster. However, if you’re only refinancing because of one of the reasons listed here, then you’re probably better off opting out of a home loan modification. So before you jump into refinancing, take a minute to do the math and figure out what’s really best for you, your home and your family.
