For most of us, the idea that we can access the equity in our property is a great thing – we look on it as a source of cash in a flash, and may even be reckless when it comes to getting a second mortgage. Whem considering this step, you need to first of decide why you are needing the money. Let us say it is for a fabulous overseas trip. Sure, it is a great experience but what you do need to realize is that you could be sowing the seeds for your own financial ruin further down the line. Does it really make sense to risk your home so that you can take a skiing trip?
That may seem a bit of a drastic way of putting it but that is essentially exactly what you will be doing. Your home is the bank’s security against you not repaying your bond and they will not hesitate to realize that security if called upon to do so – after all, they are a business organization, not a charity and they also need to manage their risk or risk going out of business as well. They are not going to let you take them down with you.
So, when is it okay to refinance your house? Sometimes, refinancing make sense, especially if it is going to add value to the property. Check what the average house in the area sells for and consider this a guide for how many improvements to make. Every neighborhood has a cap that houses within it fall under – if you improve yours to a level above this cap, you are overcapitalizing.
Now, if this is a family home and you are likely to live in it till you die, you might still want to continue with the remodel – after all, comfort in one’s home does also play a role. Just don’t go overboard – circumstances change – what happens if you get transferred or lose your job? Consider carefully, in general though, I would advise against overcapitalizing unless you are using cash.
Refinancing is also often looked at as a way to improve the rate you are paying. This does make sense fiscally as long as you are saving around two or three percent in terms of the rate paid. Again, this needs to be considered carefully because the costs can sometimes make this an unattractive offer on the whole. This shouldn’t become a habit or closing fees will add up.
The last reason to refinance is because you want to consolidate debt. If the alternative is to not pay your mortgage, do it. However, you then need to be very disciplined and not get yourself into trouble again. Pay off all credit and keep one credit card for emergencies only. Pay extra money into the bond if you want to pull yourself out of the debt hole.