Should I refinance my mortgage?
Keywords: mortgage – refinance – pmi
When you want to make a decision to refinance, you must not act on emotion or go by advertising by mortgage companies (that keep telling you to refinance whether the interest rates are low or high – they make money no matter what) or because a friend is refinancing (everyone has a unique financial situation). Here are the pros and cons from Bills.com:
Pros
Lower Interest Rate. A mortgage refinance will almost certainly lower the interest rate (you shouldn’t do it otherwise).
Interest is Tax-Deductible. Mortgage interest is usually tax-deductible, while credit card interest is not. A mortgage refinance will lower the borrower’s interest rate and tax burden.
One Simple Payment. One benefit of debt consolidation through a mortgage refinance is that all different credit cards can be paid off, leaving only one fixed mortgage payment each month. Many people find one payment much easier to manage than multiple credit cards and mortgage payments with different due dates and changing payment amounts.
Cons
Puts the Home at Risk. Credit cards are unsecured debts. This means property cannot be repossessed or foreclosed for failing to make payments — which is one of the reasons credit card interest rates are so high. When a mortgage refinance is used to pay off credit cards, borrowers are making unsecured debts secured with their home. If an unexpected event leaves the borrower unable to pay credit card bills, his or her credit score will suffer. But if that event means he or she can’t make the mortgage payment, he or she could lose a home.
PMI May Cost. If a home refinance increases the mortgage balance above 80 percent of the value of the home, the lender will require Private Mortgage Insurance (PMI). This could increase the monthly payment by $100 – $200 per month (it is not tax-deductible) and wipe out the benefit of the lower interest rate.
Mortgage Fees and Total Interest Paid May Be Higher. If you have the ability to pay off your credit debts in a short time period, you almost always will be better off paying off your credit card debt versus refinancing. First, a refinance involves significant fees paid to the mortgage company that could total two percent or more of the mortgage balance. Second, paying off a credit card debt in a short period of time could result in substantially less interest paid than the total interest paid on a mortgage paid out over 30 years.
Avoid the Trap of Running Up Cards Again. Borrowers who do decide on a mortgage refinance to consolidate debt must avoid the common trap that many people fall into – running the balances on the credit cards right back up again.
A mortgage refinance can be a good way to pay off credit cards and lower the interest rate on debts. However, it is not the “no-brainer” some people claim it to be. “Analyze your situation, your personal budget, and the pros and cons before taking the financial leap,” advises Andrew Housser.
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