Why Your Home is Not an ATM
Everyone remembers the days of 2005 and 2006, before the housing market came crashing down.
Many people’s homes were valued at an all-time high. In many cases, much higher than the home’s historic value. Which enabled many to do one, two or even three “cash-outs.”
Dipping into their home’s value by refinancing.
Getting large sums of cash was so easy, people went on extensive travel vacations. Others bought fancy cars in cash. Some went as far as using their homes like their personal ATMs.
Fast-forward to 2008 and 2009, and home values took one of the biggest hits in history. Leaving millions of homeowners with a home that was not worth anything close to the amount they owed.
Now in 2015, home values in many areas are rising again. And there will always be people who are ready to tap into their ATM made of brick and wood and a roof again.
Besides getting yourself “upside-down” on your mortgage, meaning you owe way more than the home is actually worth, refinancing comes with other serious side effects. Especially when abused.
A Major Debt that Won’t Go Away – The fact is, as long as someone continues to refinance their home every 3 or 5 or 10 years, they will have more and more trouble paying it off in a timely manner.
Higher Interest Up Front – Even if you think you’re saving by getting a lower interest rate on your re-fi, don’t let that fool you. The way mortgages work, they are heavily loaded on the front end. Which means during the first 10 years of a mortgage, you are mainly paying interest, and hardly making a dent in the principle of the loan.
When you do another re-fi, you basically set that interest clock back to day one. If you had a 30 year mortgage and you paid off 10 years of it, it’s like you now have a 40 year mortgage.
Damage to Your Credit – As you refinance again and again, your “loan to value” rate continues to increase. In cases like 2008, your loan can actually exceed your value. Giving your credit rating a sizable negative hit. And making it difficult if you ever want to sell your home and buy another one.
So the next time you think about pulling out $20,000 or more from that big ATM with the roof and a driveway, your home, think again.
The smartest way to treat a home and its mortgage is to do the opposite. Don’t bend to the temptation of refinancing. Instead, pay off your mortgage faster by including an extra principle amount with each payment you submit.