'Tis the season to refinance: In the wake of the Fed's first interest rate hike in nearly a decade, thousands of homeowners are worried rates will climb even higher and want to lock in a refinance in advance of any more increases.
As we covered yesterday, there are plenty of good reasons to refinance right now. However, there are also many great reasons not to, even in the face of an irresistible deal. Does any of your refinancing rationale sound like the reasons below? If so, you may want to think twice about refinancing.
Bad reason No. 1: You want to save money but may move soon
Perhaps the most important question to consider before refinancing is how long you plan to hold on to your home. If there's a possibility that you may need to leave in the immediate future, you probably shouldn't bother.
Why? Simple math: Since the cost of refinancing could run up to several thousand dollars, you need to stick around long enough to reap the benefits of the lower interest rate (and monthly payments). If you have to sell the property within a year of refinancing it, you may as well throw a bonfire with the thousands of dollars you spent on the refi.
So how long is long enough? Generally five years is a decent benchmark, although it varies based on the percentage you'll save.
"The general rule of thumb is that if you're not getting 1% [reduction in your interest rate] or something near it, it's probably not worth it," says Kristen Euretig, a certified financial planner and co-founder of Brooklyn Plans. "It's easy to find a refinance calculator online and figure out how long you'd have to stay in your home to make the refi pay for itself. Even if you're only going to be in your house for four years but you hit the break even point in two years, then it's worth it."
Bad reason No. 2: You'd like to make some renovations
Maybe you've decided that the house of your dreams isn't all that dreamy. It needs a new kitchen, bathroom, or landscaped yard. But taking on additional debt for renovations may not make a heck of a lot of sense unless you keep a low mortgage payment in the process, says Euretig. A refi should not be treated like an ATM.
"Renovations are not necessarily a bad idea if they increase your enjoyment and the value of your home," says Euretig. "But if you already have an upgraded kitchen and you just don't like the style, and if you have to increase your monthly payments in order to remodel it, you need to look really hard to see if it's worth it."
Spoiler: It's probably not. There are any number of reasons for refinancing, but few people go through the process with the hope of increasing their debt load. While a new pool or an addition in the back of the house may be nice, it's still an added expense -- even if it's paid for out of your monthly mortgage payments.
Bad reason No. 3: You want an easy out from credit card debt
While it can be a good idea to refinance to curb credit card debt -- just think, you'll then get to pay off your debt at 4% interest rather than the 14% typical with plastic -- it's only helpful if you can afford your new monthly mortgage payments, and you are absolutely certain that it will end your credit card debt cycle, warns David Schneider, a certified financial planner and founder of New York-based Schneider Wealth Strategies.
"One danger in using a cash-out refinance to pay consumer debt is that you may end up spending that extra cash on things you don't need -- and now, unlike before, your home is at risk," Schneider points out. So what's the worst that could happen? If you lose your job or something happens where you can't make your house payments, you could lose the roof over your head. Juggling debt is a risky hobby anyway, but throwing the house into the mix is unwise.
That said, there is one way this can work: "There has to be a very clear understanding that it's a one-time thing and you will not use your credit cards anymore," says Euretig. Vow to purge plastic from your life, and refinancing could be a good option.