Salisbury Bancorp : The best and worst reasons for refinancing your mortgage

November 15, 2022

People have lots of reasons for refinancing - everything from wanting to lower payments to cashing out equity for a lavish wedding. The question is: how do you know whether refinancing makes sense for you? We got this short list from Bankrate.com, the customer financial services company.

BEST REASONS FOR REFINANCING:

Consolidate high-interest-rate debt
If you're carrying high-interest debt on credit cards, car loans or personal loans, a cash-out refinancing, where you cash in on the equity in your home can save you money in the long term. Just beware that you'll lose part of your interest deduction if the funds aren't used to "buy, build or substantially improve" your home, according to the IRS.

Eliminate mortgage insurance
Some lenders - especially the Federal Housing Administration (FHA), which provides a home-ownership option to buyers with so-so credit - require mandatory mortgage insurance. After paying an upfront premium, borrowers continue to pay an annual mortgage insurance premium for the remainder of the term, which can't be canceled. To eliminate this, you can refinance an FHA loan into a conventional mortgage once you have 20 percent equity in your home.

WORST REASONS FOR REFINANCING:

Bankroll a splurge
Sorry, that vacation might have to wait. Tapping your home equity without a clear financial goal is dangerous. Using a cash-out refinance to pay for a new car or RV, invest in speculative assets or to splurge on other luxuries leaves you with no equity to fall back on should money get tight.

Move into a longer-term loan
Refinancing when you're already halfway or more through a 30-year mortgage is rarely a good idea, because the first years are interest-heavy. Starting all over with a new loan means that amortization starts from scratch, you'll spend the next ten years or so paying nearly all interest, instead of the principal.

Pay off your home faster
Refinancing your home with money you could use for other things - such as funding retirement or college - can be tricky. Unless there's a big difference between the interest rate you have and what you can get, it's usually better to simply pay down the principal on your existing mortgage. This can shorten the term while leaving you with the option of making smaller payments if you are faced with unexpected financial hardship.

Save money for a new home
Because of closing costs, it can take a few years for you to recoup your costs, even from a favorable refinance. If you're planning to move within the next five years, you may not see much benefit.