After years of record-setting low mortgage rates, the days of easy loans are long gone.
But even with rates on the rise, there are plenty of excellent reasons to refinance your mortgage — like changing the length of your loan, switching from a variable to a fixed rate or tapping into your home’s equity.
- Americans are facing a recession — what should buyers be doing in this housing market?
- You could be the landlord of Walmart, Whole Foods and Kroger (and collect fat grocery store-anchored income on a quarterly basis)
- What do Ashton Kutcher and a Nobel Prize-winning economist have in common? An investing app that turns spare change into a diversified portfolio
That being said, exchanging your existing home loan for a new one isn’t always the right move. Here are five times a refinance can be a terrible idea — regardless of where interest rates stand.
1. You’re too focused on the immediate savings
If you can find a better deal than what you have now, refinancing to score a lower interest rate and lower monthly mortgage payment can be smart — but not if the new home loan won’t really save you money.
A refi doesn’t make financial sense if you may be moving soon. If you’re going to save $100 a month but will have to pay closing costs of $3,000, you’ll need to stay in the home for more than 30 months to come out ahead.
A refinance also can be a money loser when it causes you to stretch out your loan term. If you’ve been paying on your 30-year loan for 10 years and refi into a new 30-year mortgage, refinancing will saddle you with 10 extra years of interest charges.
2. You want freedom from credit card debt
Paying off high-interest credit card debt with low-interest mortgage debt isn’t the worst idea, but you’d better be absolutely certain you’ve learned your lesson about using plastic.
To wipe out your credit card balances, you’ll need to do what’s called a cash-out refinance: You borrow more than you owe on your home and take out the extra in cash. That money goes to your card issuer.
But you’ll be left with a larger mortgage and larger monthly payment. If you wind up in over your head with your credit cards all over again, you could put your house at risk.
3. You’re eager to renovate
A cash-out refinance can free up home equity to pay for home remodeling, like redoing your straight-out-of-the-1970s bathroom or finally getting that new kitchen you’ve been dreaming of, with all new appliances.
A refi for remodeling can be a low-cost way to borrow money for home improvement. But avoid projects that don’t add value to your home.
You’ll be taking on more debt, so you want to feel reasonably confident that you’ll get a [good return on your home remodeling investment]https://moneywise.com/real-estate/should-i-renovate-or-relocate).
4. You want to play the markets
Investing in stocks, bonds and other assets is the best way to build long-term wealth, but it’s very risky to invest with equity pulled from your home in a cash-out refi.
Refinancing is hardly worth the trouble for the modest earnings on “safe” investments like certificates of deposit. But more lucrative investments can involve considerable risk: You could lose your money and be left with nothing but a bigger mortgage.
Refinancing for the purpose of investing can be a bad move — unless you go about it carefully. Consider using an automated investing service, which automatically adjusts your portfolio to help you weather market storms.
5. You’re enticed by a ‘no-cost’ refi
What you’ve heard about lunches is true of mortgages, too: There’s no such thing as a free one.
Any mortgage comes with fees and other costs that have to be paid. So, be skeptical when a lender claims to offer a “no-cost” refinance, and never do a refi primarily for that reason.
These loans conceal the closing costs, similar to the way a mom might hide healthy vegetables in her kids’ mac and cheese. The costs may be rolled into your loan amount, or be passed on to you in the form of a higher interest rate.
What to read next
- High prices, rising interest rates and a volatile stock market — here’s why you need a financial advisor as a recession looms
- If you owe $25K+ in student loans, there are ways to pay them off faster
- With interest rates rising, now might be the time to finally tap into your home equity for cash