Many people believe that refinancing their home is a good way to get the money that they need without having to pay a high interest rate to obtain it. While refinancing a home can be a good financial move in certain situations, it is not always a good idea to pull equity out of your home using refinancing. Refinancing a home is not a decision that should be considered lightly as there can be many negative consequences to the decision. A home should only be refinanced for a reason that justifies the expense and the reduction of equity in the home. The following reasons are not good reasons for refinancing your home.
Paying For A Vacation
While rest and relaxation are important, it is not a good idea to withdraw equity from your home to take an expensive vacation. The pleasures of the relatively short vacation are far outweighed by the long-term repercussions of taking a large chunk of money out of your home. If you cannot afford to take the vacation that you want with the money that you have been able to save up, then you should probably scale back your plans for the vacation. There are many ways to still have a relaxing vacation without spending a large amount of money.
Eliminating Credit Card Debt
Many people believe that refinancing their home is an inexpensive way to get rid of expensive credit card debt. While this may look good mathematically, it can also leave some people further behind. Refinancing a home to pay off credit card debt will reduce your debt in the short term, but if the underlying problems that caused you to run up that debt are not addressed, you could find yourself in the same position a few years from now without the financial stability of the equity in your home behind you. If you are serious about getting out of debt and staying out of debt, you should reorganize your finances and change your habits so that you never end up in debt again.
A Minimal Interest Rate Change
If you are lowering the interest rate on your mortgage by a significant amount by refinancing, then you may be paying more with the refinancing than you are saving by getting the new loan. Many people forget that there are fees associated with refinancing a home, reducing the amount that is eventually saved by obtaining the new loan. If the new payment is not significantly smaller than the old payment or the timeframe for paying off the loan is not lessened by years, it is probably not worth it to refinance the home.
Join our newsletter
Subscribe to get the latest "Engineer Your Finances" content via email.