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Refinancing your home is a large and influential financial decision. As such, it is important to carefully consider why you’re doing it before you sign on the dotted line. There are many reasons why someone may want to refinance their home. However, not all reasons are good reasons. While refinancing your home to lower your interest rate or consolidate high-interest debt may be advantageous, there are several other motives that are likely to lead to a sticky financial situation. To help you know if you’re refinancing your home for the right reasons, we’ve compiled a list of bad reasons for you to refinance your home. If your motivation is on the list, you may want to reconsider refinancing.
You want more spending money
Getting a cash-out refinance that allows you to tap into your home’s equity so you have more spending money is asking for trouble. Unless the cash-out refinance will help improve your financial security or situation, you should avoid it because you won’t be able to pay that money back if your financial situation takes a turn for the worse. Frivolously spending your home’s equity on unnecessary purchases, such as vacations or a fancy car, has a high chance of resulting in financial trouble.
To save money to buy a new home in the near future
While refinancing your home may help you save a significant sum of money over time, the process isn’t free. It is common for homeowners to pay around two percent or more in closing costs on their refinance. As such, it may take you a significant chunk of time to recoup the expenses of your decision to refinance. If your goals are to save money to buy a home in the next five years or so, you could end up losing money despite lowering your monthly payments.
To save money on monthly payments by switching to a longer-term loan
Unless absolutely necessary, you should avoid refinancing your home in order to switch to a longer-term loan to save money on the lower monthly payments. While longer-term loans typically mean lower monthly payments, it’s still a bad reason to refinance your home because you’ll often end up paying significantly more in interest payments than you would with a shorter-term loan.
Switching to a longer-term loan is especially disadvantageous if you’re already halfway through the loan’s term. Nearly all the monthly payments in the beginning years of a home loan are interest payments. Only during the final years of the loan do you start paying down the principal. As such, switching to a longer-term loan after you’ve already spent years paying the interest on your original loan will cause you to start from scratch. You’ll have to make interest payments for a lot longer and will be further from being able to start paying down the principal. Not the best move.