Mortgage rates are low…but that doesn’t mean refinancing is a good idea right now. Before you get too far down the path of a refinance you should really think about why you are refinancing. A refinance can help you meet some financial goals such as improving cash flow or paying off your mortgage more quickly. There are times, however, when a mortgage refinance may be a mistake.
1. Debt Consolidation
At first glance, paying off high-interest debt with a low-interest mortgage seems like a good idea. But there are a few problems with this. First, you are transferring unsecured debt (such as credit card debt) into debt that is backed by your house. If you are unable to make the loan payments, you can lose your house Not paying credit card debt can wreck your credit, but that isn’t as bad as a foreclosure.
2. Moving into a Longer-Term Loan
Refinancing into a mortgage with a lower interest rate can lower your monthly payment, but it can increase the overall cost of the loan.
3. Saving Money for a New Home
As a homeowner, you need to determine how much a refinance will cost – and how much you will save each month. If it will take three years to recoup the expenses of a refinance and you plan to move within two years, you are not going to save any money.
4. Switching from an ARM to a Fixed-Rate Loan
This can be a great idea if you intend to stay in the home for years to come. If you have an ARM, make sure you know what index it is tied to, the frequency of loan adjustment, and the caps on the loan adjustments.
5. Taking Cash Out for Investing
If you are disciplined and will use the extra money for investment, this can be a good option. Make sure you are a savvy investor before playing with the equity in your home.
6. Reducing Your Payments
Reducing your payments by lowering your interest rate is generally a good idea. But don’t forget about the costs of refinancing. And remember: you will be making more mortgage payments if you extend the terms of your loan.