These days it seems like everywhere you look there are ads encouraging people to refinance. In many cases refinancing can be a very smart options for home buyers. But… in some instances it can be a really BAD idea! In fact, sometimes it’s actually a huge mistake to refinance your home. Let’s take a look at three of the biggest reasons to say NO to a refinance.
Many home owners get excited about the idea of using the equity of their homes to pay down other debt. While a much lower mortgage interest rate on credit card debt may seem like the way to go, the thing many people fail to consider is whether or not they’ll actually be able to afford their new monthly mortgage payment.
If you can afford the higher payment, you have to be honest with yourself as to whether this move will genuinely get you out of debt in the first place. You may be tempted to spend that extra cash on other things instead of actually paying down existing debt as originally planned. Others find it extremely difficult to resist the urge to charge up those available credit cards once again, continuing the cycle and leaving them in even more debt than they originally started with.
The only way a scenario like this can truly work is if it’s a one-time thing and you vow not to use your credit cards anymore. If you’re ready to say goodbye to plastic once and for all and you’re comfortable with the higher mortgage payment, only then should you consider refinancing to pay off credit card debt.
The promise of a lower payment may seem great in the moment, but if you’re only planning on living in your home for another year or two, it might not be worth it. Why? Because refinancing costs money. So, even if refinancing will bring your monthly payments down, the money you have to come up with upfront may cancel out those savings.
For instance, let’s say refinancing at a new rate will lower your payments by $100 a month. Seems like a good idea on the surface, right? But if the process is going to cost you $4,000 in closing costs and fees, it will take you over three years just to break even. And if you move sooner, you’ll actually be losing money on the deal. So, if you’re not planning on being in your current home long-term, it may not be worth refinancing at all.
Ok, this one’s a little harder to get across, especially for young home owners who are many years away from retirement. But even if it’s a long way off, it’s still something you have to consider. The reason for this is that in most cases, refinancing basically “resets” the clock on your mortgage. So, if you’ve been paying for five years on a 30 year mortgage and you refinance to another 30 year loan, you’ll essentially be tacking those five years back on.
Some might argue that lowering your payments in the short term will provide greater financial flexibility, as well as extra cash to put away for retirement. But the fact is, if you’re still strapped with a mortgage at age 65 or beyond, you’ll have less financial flexibility and freedom then, which means less cash for enjoying your retirement. Again, this isn’t always the case, as some mortgage refinances are designed to shorten the term of your loan, but if you’re looking toward a lower rate and lower payments, you need to carefully consider the implications another long-term loan might have on your future.
While refinancing your mortgage certainly has its benefits, it’s important that the decision to do so not be taken lightly. Keeping the above drawbacks in mind can help you make a more informed and therefore wise choice that you won’t come to regret down the road.
If you’re still on the fence about whether or not a mortgage refi is the right option for you, contact us and we can help you. We can answer your questions, assess your current needs and future goals and help you more confidently choose the direction that’s best for you.