Home Mortgage Calculator - Identifying the Wrong Reasons for Refinancing Your Home
Many homeowners will jump at the chance to refinance their home, but the reality is that while it can sometimes be a good idea, there are plenty of situations where it's not in the best interest of the homeowner. Typically it comes down to one thing: the reason you're considering refinancing. There are several reasons that are almost always the wrong reasons to refinance your home.
Refinancing Your Home to Pay Down Credit Cards or Other Unsecured Debt
It may seem like a good idea to consolidate debt and pay off high interest, unsecured debt with a low interest mortgage. However, doing so can have huge negative consequences.
Increasing the Length of Your Loan
Often homeowners will refinance to a longer loan term, which brings down their mortgage payments. However, when you add another 5, 10, or more years to your mortgage, this can lead to paying significantly more interest over the course of the loan. Before you refinance to extend the length of your loan, crunch the numbers to see what the cost will really be.
Saving Money to Buy a New Home
You may decide to refinance your home in an effort to lower monthly mortgage payments so you can save up for a down payment on a new home. However, keep in mind that it typically takes around 3 years to recoup the cost of refinancing. If you're planning to move in a shorter time frame than that, then you will end up paying when you thought you were saving.
Switching From an ARM to a Fixed Rate
For many homeowners, switching from an ARM to a fixed rate mortgage can make a lot of sense – especially if you plan to live in your home for many years. Just keep in mind that all ARM mortgages are not created equal. Before you refinance your home, review the terms of your current mortgage. You need to know what your index is tied to, how frequently the loan adjusts, and what the various caps are. Typically there will be a first cap, an annual cap, and a lifetime cap. It may turn out that a fixed rate is worth the cost of refinancing, but you shouldn't make the move without consulting the numbers.
Using Home Equity to Invest
The problem with taking cash out when you refinance is that it's simply too easy to spend that cash. Even if you are very disciplined and truly use the extra cash for investing, it may not pay off in the long run. For example, if you were to pay down your mortgage an extra 5% per year, that would be a much better investment than throwing your money into a CD that will only earn 2% every year.
Refinancing your home can make a lot of sense – but only in the right situations. Carefully consider your motivation and what you hope to get form your refi – and make sure the numbers are there to back up your expectations.
Refinancing Your Home to Pay Down Credit Cards or Other Unsecured Debt
It may seem like a good idea to consolidate debt and pay off high interest, unsecured debt with a low interest mortgage. However, doing so can have huge negative consequences.
- If the worst happens and you lose your job or experience other financial hardship that leaves you unable to pay your credit card bills, the worst that can happen is you'd ruin your credit and have collection agencies after you. However, as soon as you roll that into your mortgage, if you become unable to pay those bills you put yourself at risk of losing your home.
- The unfortunate reality is that often once credit cards are paid off, consumers will end up charging up their balances again. When the credit card debt is transferred into a refinance, then it can feel like that money has simply been forgiven and increase the desire to charge more – which leaves you with a larger mortgage and right back in high interest credit card debt.
Increasing the Length of Your Loan
Often homeowners will refinance to a longer loan term, which brings down their mortgage payments. However, when you add another 5, 10, or more years to your mortgage, this can lead to paying significantly more interest over the course of the loan. Before you refinance to extend the length of your loan, crunch the numbers to see what the cost will really be.
Saving Money to Buy a New Home
You may decide to refinance your home in an effort to lower monthly mortgage payments so you can save up for a down payment on a new home. However, keep in mind that it typically takes around 3 years to recoup the cost of refinancing. If you're planning to move in a shorter time frame than that, then you will end up paying when you thought you were saving.
Switching From an ARM to a Fixed Rate
For many homeowners, switching from an ARM to a fixed rate mortgage can make a lot of sense – especially if you plan to live in your home for many years. Just keep in mind that all ARM mortgages are not created equal. Before you refinance your home, review the terms of your current mortgage. You need to know what your index is tied to, how frequently the loan adjusts, and what the various caps are. Typically there will be a first cap, an annual cap, and a lifetime cap. It may turn out that a fixed rate is worth the cost of refinancing, but you shouldn't make the move without consulting the numbers.
Using Home Equity to Invest
The problem with taking cash out when you refinance is that it's simply too easy to spend that cash. Even if you are very disciplined and truly use the extra cash for investing, it may not pay off in the long run. For example, if you were to pay down your mortgage an extra 5% per year, that would be a much better investment than throwing your money into a CD that will only earn 2% every year.
Refinancing your home can make a lot of sense – but only in the right situations. Carefully consider your motivation and what you hope to get form your refi – and make sure the numbers are there to back up your expectations.