When refinancing might not be the right choice

House on pile of money

Refinancing your home loan might not always be the best choice.

In some cases, people refinance their mortgages as a way to ignore their money troubles.

While getting a new mortgage can be an excellent way to lower your monthly payments and cut your interest payments over the life of your loan, it is only good if you actually pay off your loans.

Far too many people refinance to consolidate their debt, only to find themselves quickly struggling to pay the bills again. And most who do refinance today are not taking cash out (as once was the case) because they have so little equity in their homes.

This means that using your home's equity to pay off high-interest credit card bills is probably not an option.

If your overall debt problems are the primary reason why you're considering a refi, here are 3 reasons why you should consider looking elsewhere for help:

Refinancing shuffles your debts. If you are struggling to make your mortgage payments and other loan payments like credit cards and auto loans, a refinance might not address the problem. That's because getting a new mortgage doesn't pay off debt, but rather restructures it.

This can be like a shell game, where the debt is moved from one loan to another.

You might be in debt longer. Many home owners who refinance their home end up extending the life of their loan.

If you have paid 10 years on a 30-year mortgage and refinance into a new 30-year mortgage, you can lower your interest rate and monthly loan payments, but you'll be in debt longer and increase your total borrowing cost.

Extending your loan rarely pays off. Extending your home mortgage through a refinance may be worth it if you use the monthly cost savings constructively.

Are you going to pay off additional high interest debt with the savings? Will you put more money toward your home loan principle?

Unfortunately, most people do not save, invest or pay down debt with the savings. If you eventually just absorb the savings into your family’s budget and increase your standard of living, then extending your loan’s payment terms would not be a good idea.

If you can't afford to stay in your home (and you have no equity built up), your best bet may be to ask your lender for a short sale. It beats going through foreclosure, which could be where you're headed if you can't get debt problems under control.

Follow Interest.com on Twitter.

Leave a Reply

Your email address will not be published. Required fields are marked *