Bad reasons to refinance your mortgage

December 7, 2021

When it comes to personal finances, assets are extremely important. And, for most people, their property is their most valuable asset. Having said that, there are plenty of good reasons to refinance your mortgage. However, there are some bad reasons too. This guide will focus on the bad reasons for refinancing your home, so you don’t make a mistake.

To Consolidate Debt

If you have a number of debts, this could be a good reason to refinance your mortgage. However, it’s not necessarily something you should do. Even though there are plenty of great reasons for debt consolidation, refinancing your home is not one of them. Furthermore, debt consolidation doesn’t actually lower any interest rates either, so there’s no benefit. You may even end up paying more in interest over the life of your loan, which defeats the point.

To Move into a Longer-Term Loan

Some people refinance their homes with a longer-term loan in an effort to reduce their monthly mortgage payments in order to save money for other expenses. There are pros and cons to this. The advantage is a lower monthly payment, but some cons include paying more money in the long run since you are increasing the amount of interest paid on the life of the loan.

To Save Money for a New Home

One of the main reasons people refinance their mortgages is to free up money. Unfortunately, this isn’t always a good idea either. Saving toward your next home should be done in an account specifically for that purpose. The interest rates you earn on savings accounts are typically much higher than those on mortgages, so it won’t be beneficial to do it the other way round.

To Switch from an ARM to a Fixed-Rate Loan

An adjustable-rate mortgage (ARM) can be a great choice in some circumstances. However, it might not be the right time to switch to an ARM if you’re looking to refinance your house. ARMs typically adjust more often than fixed-rate loans, so they’re riskier too. Also, when you switch from an ARM to a fixed-rate loan, you’ll almost certainly have to pay closing costs. So, unless it’s absolutely the right time for an ARM, you should avoid this bad reason for refinancing your home.

To Take Cash Out for Investing

Getting money from your property is a good idea for many people. However, there are some bad reasons to take cash out of the value of your home. The main one is to invest in something else. Rather than use this strategy, it’s better to just wait until you have enough money saved up for what you want. Then, you can keep the cash in low-risk investments until you’re ready to buy. This is a better option than taking out a home equity loan and paying interest on it long-term.

To Invest in a Business

If your property is generating income, then it could be an excellent time for investing. In some cases, it may be a good idea to take out a home equity loan and use it for investing in your business. However, this isn’t always a great option either. Paying interest on the money you borrow will reduce your overall return on investment (ROI). If you can wait until you have enough saved up for what you need, it’s much better to do so. Like with the previous point, it’s also a good idea to invest in low-risk assets until you can afford to take on more risk with your business.

Other Tips if You Do Refinance: Increase Your Home’s Value

If you are considering a refinance for a good reason, many homeowners also choose to finish upgrades and projects around the house that will increase the value of their home. The challenge there can be that you may not have the cash available to pay for certain upgrades. Homeowerners may want to consider a personal loan to pay for these home improvement costs. Homeowners may choose this option in order to complete the renovations in a timely manner before refinancing. Just be sure to factor in the monthly payment on the loan.



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