A home refinance loan means you can borrow money from your home’s accumulated equity. However, you shouldn’t refinance your mortgage for random reasons. Let’s discuss when you shouldn’t refinance your mortgage.
Bad Reasons to Refinance Your Mortgage
Consider the following reasons why you should hesitate to pursue a refinance loan.
- For consolidating debt
Using your mortgage to refinance for a cash advance means you are at risk of losing your home if you cannot repay the loan. The bank can put your home in foreclosure, and you’ll be forced to move out without your equity. It will also be devastating to your credit score.
- To move into a longer-term loan
Some homeowners decide that refinancing a mortgage is a good idea for lowering the interest rate on their monthly mortgage. In the short term, it provides savings, but you can potentially pay much more than you expected over the longer term.
- For saving money for a new home
Homeowners looking to move within a few years sometimes gravitate toward refinancing their current home to fund the down payment on their next home. The factors that impact your decision beyond the home’s price and down payment amount are your credit score, property taxes, and loan terms. A new home loan likely requires you to purchase homeowners insurance.
- To switch from an ARM to a fixed-rate loan
An adjusted-rate mortgage (ARM) can be tricky in its terms which eventually may lead to higher rates. Homeowners who plan to keep their homes for a long time can benefit from switching to a fixed-rate loan to avoid future rate hikes. But check the index to which your ARM is tied and what the terms and caps are on loan adjustments, which may work in your favor.
- To take cash out for investing
Using refinancing to put money in the stock market is a high-risk idea since the market is very unpredictable. This volatility can be emotionally disturbing to people who aren’t familiar with the market’s ups and downs.
- To reduce your monthly payments
Reducing your monthly payments by lowering your interest rate can be a good idea. Just be aware of the closing costs and fees, which can be up to 3 percent of your loan amount.
- To take advantage of a no-cost refinance
There’s no such thing as a “no-cost” mortgage loan, so if you hear about one, stay away from it. Refinance offers that sound too go to be true usually have hidden fees.
How Often Can You Refinance Your Home?
Legally there’s no limit on refinancing, but lenders usually set limits. As a homeowner, your limitations on how often you refinance are based on your home equity and credit score. Understand that mortgage lenders often impose prepayment penalties on existing loans.
Learn More Before You Decide on Refinancing with Fidelity Mortgage Lenders
Even though refinancing a mortgage seems like an easy way to get a large cash advance if you have regular income to pay back the loan, be aware of these drawbacks. At Fidelity Mortgage Lenders, we have loan experts who can help you refinance your mortgage at the right time. Contact us today to get started!