Mortgage refinances make good sense in many situations, especially with today's low rates. However, there are some cases when it simply isn't a good idea. Here are four times when refinancing might not be the best option.
Cashing Out to Buy More Stuff
So you've paid your mortgage down over the past few years and now have equity in your home - congratulations! But if you're tempted to access that equity to make a big purchase, beware. A cash-out refinance to buy a big ticket item, such as an RV, luxury sports car, or expensive boat can be a bad financial choice. This is because unlike most real estate, big ticket "stuff" depreciates in value fairly quickly, so the increased value of your assets may not match the higher debt you took on to pay for it.
When Your New Low Rate Ends Up Costing More
When the additional fees and penalties to get a new mortgage add up to more than the savings of the lower rate, refinancing may be a bad idea. To figure it out, get the prepayment penalty on your current mortgage. Then find out what the closing costs on the new mortgage. These may include application and set-up fees, appraisal fees, and legal fees. If the total of your prepayment penalty plus closing costs is more than your savings from a lower rate, refinancing at this time may not be a good idea.
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When You're a Repeat Refinancer
Refinancing other, higher interest rate debt into your mortgage may actually be a wise financial choice....the first time. After all, credit card debt, car loans, and other retail loan balances can creep up, making it a struggle to pay all your bills. While refinancing to a higher mortgage amount at today's low rates to pay off other debt can get you back on track, don't make it a habit. Repeat refinancers who continue to take on higher mortgage amounts face the possibility of having more debt and less home equity in the future.
When You Refinance Into a Longer Term
Have you had your mortgage for several years? If so, plan carefully so you don't end up refinancing into a term that will add years onto your mortgage, causing you to pay more in interest. This happens because when you start making payments on your mortgage, most of the payment is going to interest, and very little goes to principal. With each payment you make on your mortgage, a little more goes to principal, reducing the interest you owe. So if you started with a 30 year mortgage term, and 10 years into the term you refinance into another 30 year mortgage, you'll end up starting back at the beginning again, with a payment that is mostly interest and very little principal. Instead, consider refinancing into a 20 year mortgage.
When You Plan to Move in the Near Future
If you to move within a year, you may have considered renovating to make your home more saleable. While this may help you get top dollar for your home, think carefully before refinancing to pay for the renovations. A prepayment penalty to get out of your current mortgage plus closing fees to arrange your new mortgage may make the cost of a cash-out refinance for renovating a poor choice if you plan to move within a few months.