The Downside of Refinancing
Refinancing your home loan can be just thing that can bail you and your family out of financial hot water, however, before you even consider taking this step you need to seriously take a look at the downside of refinancing.
To illustrate the downside of refinancing let me tell you a personal story about a friend of mine, we’ll call him Joe. Joe was a pretty big actor in Hollywood for a few years, he had a hit TV show and he was raking in the cash. The first thing Joe did when he started to make money was go out and buy himself a home. To make matters even better, this was before the housing boom of the last 5 years and he picked up a home for four hundred thousand dollars that is now worth about one point two million. The interest rate back then wasn’t as great as could have been at roughly 7.5 percent but it didn’t matter. The price was right and his monthly payment was affordable. Sounds great right? Well it was… for a while.
Well the years started to pass and Joe’s TV show got cancelled and the parts just didn’t come in as often as they once did. There are lulls in the entertainment industry of course, so Joe didn’t see it as anything to really worry about. His house, now worth one point two million dollars, he had plenty of equity in his home. That combined with the lower interest rates now available Joe refinanced his home. He took out three hundred thousand dollars and lowered his interest rate. It dramatically increased his monthly mortgage payment but it didn’t matter, Joe knew the parts would come in and he’d be back on top once again. The only problem is, they didn’t.
Joe’s parts didn’t increase, in fact the continued to decline. To make matters worse, the housing bubble burst and their home was now only worth eight hundred thousand dollars and no bank was willing to refinance again with such a slim margin of equity in their home. This led to a bad situation in which Joe couldn’t afford his monthly mortgage payment. Ultimately, he and his wife rented out their home and moved into an apartment. They eventually sold.
This story illustrates exactly what can happen if you refinance your home without taking the different possible consequences into consideration. So, while refinancing can definitely help you out in many situations. There is also definitely a potential downside of refinancing your home mortgage.