Refinancing your mortgage may seem useful in theory, but it’s not always the best move. For one, getting a loan approval requires you to be a triathlete: with good income, good credit score, and great value in your home. Also, it makes no sense financially to get refinancing if you plan to sell your house in the next few years.
Borrowers typically refinance at the end of the second year to get the best long-term rates, prmiloans.com explains. Should you listen to the ads and friends telling refinancing can get you a good deal? You probably should take caution, especially if these are your reasons:
Refinancing to consolidate debt puts you at risk of losing your home. At first glance, using a low-interest mortgage to pay off a high-interest debt seems like a good idea, but here’s why it’s not: if you’re moving a credit card debt into a debt backed by your home, inability to meet repayments can lead to foreclosure. Not paying your credit card debt can result in serious penalties, but they don’t compare to being homeless.
Moreover, once people find that they have repaid their credit card debt, it’s too easy to start spending again and pile up on the bills. And before they know it, they’re facing a bigger debt than before.
Saving Money for a New Home
Calculate how much a refinance will cost and how much you’ll save each month. If you need four years to recover the expenses of your refinance, and intend to move in three years, you’re not really saving anything, despite the lower monthly payments.
Switching from Adjustable Rate to Fixed Rate
This can work for homeowners who plan to stay in the home for long. But if you’re simply scared of the bad reputation of an adjustable-rate mortgage, study the terms carefully before taking the leap.
A mortgage refinance has worked for many, but not every situation calls for it. Evaluate all your options before making a potentially dangerous decision.