Mortgage Refinance – Is It Right For You?

There are several reasons to consider refinancing your mortgage. When rates are low, you can lower your monthly payment and/or the total amount of interest you will pay over the life of the loan. You may also want to take out some equity to finance home improvement projects or pay off other debts.

But as a method of adjusting debt it has some drawbacks that should be considered before making that big step.

The most important reason is that if you refinance your home often, you are virtually guaranteeing you will remain in debt for a longer time! The reason is, that MOST of the interest is paid in the first few years of the loan (and very little principal is paid, see our mortgage acceleration section for more information). So every time you refinance, you start over again, and owing more than before! (because of closing costs added to the loan, fees, cash-out, etc). We have seen people who used to refinance every year, and when the market went down, they owed more than what their houses were worth.

All that takes time and can cost you a substantial sum of money before the process is complete. You'll want to be sure to run some realistic calculations before making a final decision. Don't get me wrong, there are times when refinaning your home makes a lot of sense. For example, if you are currently paying 8% on your mortgage, and you can get 6%, it makes sense. But make sure you don't refinance again, otherwise you will remain in debt forever. Also, be very careful with those extremely risky programs offered by banks these days, where your monthly payment doesn't even cover the interest (which, in turn, is added to your principal). We have seen several people lose their homes because of these programs. Another program that you should avoid is the so-called interest-only programs. Any program that does not pay off your principal does not help you. What happens when house prices drop? You end up owing more than what your house is worth. You might as well rent, and avoid all the headaches.

One reason some consider making the effort, though, is almost always a poor one: to pay off credit card and other high interest debt. There are many ways to offload that debt without going through the drastic process of refinancing your primary mortgage loan (see our how to get out of debt section).

If you have reasonable credit and some equity, you can get a second mortgage or a homeowner's equity line of credit (HELOC). The rate may be slightly higher, but you will find the effort is considerably less. It also protects you in case of financial reverses. Provided you continue to make the primary payments, if you slide for a while on the secondary you are unlikely to be at risk of losing your home.

The second reason is more fundamental. Rather than continuing to seek a way out of debt by borrowing yet more money, you should first make serious efforts to reduce your dependence on borrowing. Some readjustment of current debt may be a good plan - if you can achieve a lower total outstanding debt, a lower interest rate or negotiate relief from some of the payments.

But borrowing more only adds to your long term problem. This should be a last resort, not the first thing you think of as a way out of your debt problem.

Debt consolidation through mortgage refinancing often leads to merely reshuffling your debt, sometimes adding more interest and making your situation worse. But, if it's coupled with a payment plan that does in fact gradually reduce the burden, while making it possible to meet your obligations, it could be a good plan for some people.

In the end, the only way to know for sure is to objectively examine all your outstanding obligations and research the different plans available. Some combination of debt forgiveness, lowered monthly payment(s) and reduced interest payments is the ideal you should shoot for.

Don't surrender your home in order to deal with a short term problem that can be fixed by other methods.

Home | Your first step | Budgeting | Debt Consolidation | Debt Reduction | Credit Cards
Fico | Home Loans | Mortgage Acceleration | Mortgage Acceleration Strategy |
Car Loans | Student Loans | Bankruptcy | Resources | Get our of debt |
| Contact Us | Site Map