Reasons Why You Shouldn’t Refinance Your Mortgage

Refinancing your mortgage is not always the best idea, even when mortgage rates are low and friends and colleagues are talking about how they snagged the lowest interest rate.

While financial goals such as increasing monthly cash flow by refinancing to a lower rate or paying off your home loan well before the 30-year term can be achieved if your refinance to a new lender.

Think about why you are refinancing before you jump on a comparison site.

How Often Can You Refinance Your Home?

While there are no regulations that cap how often you can refinance your home, lenders typically make it difficult for borrowers through serviceability assessment particularly as your loan term reduces.

Your ability to refinance also depends on the equity you have in your property and with positive credit reporting in place, your credit score matters.

It may sound strange that a mortgage platform designed to get borrowers a better home loan over the life of their mortgage is cautioning on refinances. Hey, we want everyone to win so, here are four reasons you shouldn’t refinance your mortgage.

1. To consolidate debt

This can be one of the most dangerous financial moves any homeowner can make. On the surface, paying off high-interest debt with a low-interest mortgage seems like a smart move, but there are some potential problems if you’re looking to consolidate significant balances.

First, you are transferring unsecured debt (such as credit card debt, personal loans, car loans) into debt that is backed by your home.  The interest payable on the loan also increases with the larger loan amount.

Second, many borrowers find that, once they have repaid their credit card debt, they are tempted to spend again and will begin building up new credit card balances that they will have more trouble repaying, and the cycle continues.

2. To save money for other investments

As a homeowner, you need to make an important calculation to determine how much a refinance will cost and how much you will save each month. If it takes longer than 12 months to recoup the expenses of a refinance in interest savings, it means despite the lower monthly payments, you are not saving any money at all.

A point to note, sometimes lenders provide cash back offers on refinancing, this combined with a lower interest rate can cover the recommended 12-month cost recovery period, making the refinance a worthy financial decision.

Check how your home loan compares

3. To take cash out for Investing in stocks

For a novice investor, even when the stock market isn't rocky, this is not a generally good idea. The problem with cash is that it is too easy to spend. If you are disciplined investor backed by solid advice and will truly use the extra money to invest this can be a good option.

However, paying down a mortgage at 2.8 percent per year can be a better deal than plunking your cash into a bunch of small cap shares. Make sure you are an informed investor before playing with the equity in your home.

4. Being sold a no cost refinance

A "no-cost" mortgage loan does not exist. There are several ways to pay for mortgage registration and transfer cost when refinancing but in every case, the fees are paid one way or another.

Borrowers can pay cash from their bank account for a refinance, or they can roll the costs into their loan balance and increase the size of their principal. Again, the 12-month cost recovery test should be applied, to confirm if it’s worth refinancing.

The Bottom Line

Refinancing a mortgage is a wise financial move for many homeowners, especially ones who have been with their current lender for more than two years and their long-term financial goal is to increase cash flow while reducing the life of their mortgage.

Be sure to evaluate all your options before making a decision.

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This article via BI does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.