Real Estate Deal Analysis & Advice

6 Signs You Are Refinancing for the Wrong Reasons

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Many argue there has never been a better time to refinance. The equity is there for the taking, and there's nothing like getting a solid cash infusion deposited into your bank account to move forward with your big life plans and dreams.

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While it has gotten a bit trickier to pull equity out of property these days, it is still doable.

I recently refinanced two properties. I probably waited longer than I should have to do it. My mortgage payments were comfortably low, and my loan amount went way down while my equity grew.

Once I had a specific strategy to move my investments from being bulky in appreciation to cash flow, it made sense to refinance. When I did, I hardly noticed that my payments increased, and my plan to put the money into cash-flowing assets would propel me toward my financial goals.

But that isn’t always the case.

When Is It a Bad Idea to Refinance?

Now is when the car screeches to a loud and sudden STOP. Like with all financial transactions, you need to take a step back and look at the whole picture. Sometimes what seems like a great idea does not actually make a whole lot of sense. (Or should I say cents?)

Related: Stop! Before You Refinance, Consider These Tax Traps & Opportunities

1. You are passionate about shiny objects.

You want to buy a new car. You are over the old Prius you have been driving for eight years, and you could take $40,000 out of your house and get a new one. You’d get all the bells and whistles, and a new car will smell so good. And imagine never having to go to the mechanic except for an oil change? Besides, you love the gray color that just came out.

I can’t argue. It sounds pretty good.

Now, let’s look at the flip side. First, as soon as you drive that fancy new car home, you’re losing value. Cars are by far the worst investment you can make. Their value depreciates quickly and never stops going down.

If you don’t have the extra money in hand for a car, keep on driving one that is in your budget. (And no—leasing a car is not a better option.)

You also need to keep in mind that whenever you're doing a cash-out refinance, you'll owe more on your house and your payment will increase. So, if your goal is financial freedom and you do decide to refinance, wouldn’t it make more sense to use those funds to invest in another property?

As Dave Ramsey says, “If you will live like no one else, later you can live like no one else.”

2. You don’t know the difference between good and bad debt.

You have had student loans for years. Isn't it time to get rid of them?

I can’t tell you how many people I know who made a lot of money and paid off their student loans only to be broke afterward.

Your interest rates on student loans are low. Paying off your student loans does not leave you with an asset like real estate. It just gets rid of a student loan.

It is best to continue paying the loan off slowly and investing in another asset. Remember, assets make you wealthy, paying off student loans does not. Your student loans bought your education, and you cannot put a price tag on that.

Case in point, not all debt is bad. The sooner you adopt this belief, the faster you will make a fortune in real estate.

Close up customer hand choose sad face and blurred smiley face i

3. Your focus is on one great day instead of a financially free life.

Let’s say you’re getting married. So many people fall in love with the idea of a fairytale wedding. And let’s not forget the honeymoon!

Why not pay for it with a cash-out refinance of $30,000-$50,000? Oh heck, it is once in a lifetime! How about $70,000 to buy you one day you will never forget and a honeymoon too?

It sounds so fun, but that increased payment and blowing the money on one (albeit wonderful) day will not make a financially free ever after.

4. A friend wants you to invest in a new business idea that will make you a ton of money.

I do not want to be a Debbie Downer, but if it sounds too good to be true, it might be.

All investing carries an element of risk. As a seasoned real estate investor, I am the first to agree that no risk equals no reward.

Still, the first thing to do is evaluate. If the business venture seems like a no-brainer, then it may be worth the risk of a higher mortgage payment.

But the additional expense to the mortgage payment will mean less cash flow. If this may create a financial hardship, you need to decide how sound the investment is and how soon it will start making money. While you always want to be moving your money to make more money, you do not want to over-leverage to the point where you lose your home or investment property.

Stocks are more of the same. These investments can be very lucrative if you can afford them. However, taking equity out of your home in a refinance for this sole purpose places an incredible amount of risk and stress on your pocketbook.

The difference with real estate is that you can generally find a deal that makes sense based on the variables. For instance, maybe you refinance out $20,000 and buy cash-flowing property making 12% annualized cash flow.

money-investor

5. Your old kitchen and bath are intolerable.

A new kitchen with stainless steel counters would give you more space to cook, which you love. A larger bathroom would allow you to put in the beautiful tub you have been dreaming of. All you need to do is refinance! The money is there!

Remodeling a home is fantastic, but a brand new kitchen often won’t add up to a higher sales price to match the investment when you decide to sell.

Trust me—I have made an expensive mistake before. The only difference was that I could afford to make some modifications to my home at the time, knowing there may not be a return on that investment.

These days there is a lot of instability of jobs and income. Redecorating is not a moneymaker, and refinancing for this reason could leave you with a great kitchen you can no longer afford.

6. Interest rates are at an all-time low, and you want a piece of the action.

The economy is currently at a point where people feel short on funds but can still access cash. It may seem like a great idea to take that cash out because you can get it, but without a plan to invest it, you could end up spending it on items you do not need.

If you can comfortably afford your payment now, why would you risk raising the amount owed each month without a solid plan in place?

If you cannot pay your bills, you will ultimately lose your house. So while it may seem like a good idea to grab some fast cash, you need to make sure you are not taking on more than you can handle.

Take risks when you can afford it. Otherwise, have a strategic plan in place to mitigate risk, and make sure you can manage the expense if the numbers do not end up the way you expected.

Related: The 3 Major Reasons It Makes Sense to Refinance a Property

If you want an expensive wedding or a new car that has no return on investment, please ask yourself what your ultimate goals are. If one is financial freedom, you won't get there if you have other priorities that don't include managing your choices.

To be sure, being in a position to refinance is incredible because it means your property has appreciated and earned equity. Make sure you stay on the trajectory to keep that going and think twice to make sure you are refinancing for the right reasons.

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How do you decide whether to refinance or not? 

Tell us your process in the comments.

Tamar Hermes is a full-time real estate investor and educator. After building successful businesses in the retail and entertainment industries, she turned her attention to real estate with a missio...
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    Michael charles Gordon Rental Property Investor
    Replied 4 months ago
    Absolutely incredible post. I feel most people fall victim to the shiny object factor,cars,clothes,appliances,weddings. I am very new to this space but spent a year or so reading and listening to podcasts and just absorbing information. Last month we refinanced our home and bought a house and this will be our first of hopefully several buy and hold rental properties. Our first rental property still has a fair amount of equity and should cash flow $400 on the bottom end of my estimation.
    Michael charles Gordon Rental Property Investor
    Replied 4 months ago
    Awesome and informative post!
    Randy French
    Replied 4 months ago
    Good information. I recently refinanced a 4 plex and increased my monthly cash flow by $200/month.
    Tamar Hermes from Los Angeles, CA
    Replied 4 months ago
    @randy fresh Sounds like a great deal and a good reason!!
    Danny Roberti
    Replied 4 months ago
    I’m currently in the process of refinancing so this article caught my eye. Luckily I didn’t fall into any of these reasons which is great! I would just also mention that not all refinancing pulls out equity. A lower rate could mean lower monthly payments, or you might switch terms from a 15 year to 30 year, for example.
    Tamar Hermes from Los Angeles, CA
    Replied 4 months ago
    @Danny Roberti Yes, that would be a reason to refinance for sure!! Refinancing is great, as long as there is a strategy and an opportunity to make or save money.
    Amanda Klawitter Rental Property Investor from Bakersfield, Ca
    Replied 4 months ago
    Love this and how it highlights some of our natural “they’re doing it, so we should too” patterns and how that doesn’t serve us if we don’t have a plan in place. Reminds me of how important it is to stick to your journey, individual goals & run everything with a fine tooth financial freedom comb!
    Tamar Hermes from Los Angeles, CA
    Replied 4 months ago
    @Amanda Klawitter So well said!!
    Daniel Mina
    Replied 4 months ago
    Thanks for the post. One thing I think worth pointing out is that depending your rate and where you are in your term, you could potentially do a cash out refi while also reducing your monthly mortgage. If the goal is to lock in appreciation or pull equity to invest elsewhere, I think a Cash out refi is a great option to consider.
    Tamar Hermes from Los Angeles, CA
    Replied 4 months ago
    @Daniel Mina I agree!! Thanks for highlighting that!!
    Corey Vandenberg Lender from Lafayette, Indiana
    Replied 4 months ago
    I disagree with home improvements: first, the house should pay for itself or what is the point? The alternatives is high interest unsecured debt or a never ending home equity line. Second, the gauge for the home improvement should be the equity it adds, only a renovation loan such as an FHA 203k will show the future value of the home after the improvements. This will help to judge whether you should have it done or not (and can afford it or not)...
    Tamar Hermes from Los Angeles, CA
    Replied 4 months ago
    @Corey Vandenberg Yes, good point. If you are doing home improvements to add value to your home and can afford them. Many times people go crazy on improvements and end up struggling as a result. I have friends who own a beautiful home. They spent a lot on improvements and with COVID-19, they found themselves out of work. They are living at her mom's home and renting the house. They are not young kids either.
    Jacoby Atako Financial Advisor from Las Vegas, NV
    Replied 4 months ago
    The timing of this article was pretty funny. It popped up on my phone a few minutes after the notary left my house for document signing on a refi. But it only validated my decision luckily lol
    Tamar Hermes from Los Angeles, CA
    Replied 4 months ago
    @Jacoby Atako Congrat!! Many good reasons to refi right now!!
    Deanna Opgenort Rental Property Investor from San Diego, CA
    Replied 4 months ago
    Depending on your situation & goals, a cash-out refi or HELOC right now could put you in a better position to buy more RE when everything (maybe?) hits the fan. Even in normal times there are always certain properties where the sale has to be fast, and it has to be cash (probate, bankruptcy, unfinanciable fixers) . Some of these are a good deal.
    Tamar Hermes from Los Angeles, CA
    Replied 4 months ago
    @Deanna Opegnort Agreed!
    Janel York from Minneapolis, MN
    Replied 3 months ago
    Thank you for this article, Tamar. I'm in the process of taking action to find and purchase my first investment property after many years of living below my means, aggressively saving, and building up a large amount of equity in my home. I am analyzing what would be the best financing option for me to use and I plan to invest in commercial multifamily buildings, so articles like this help me in my analysis.
    Hongtik Cheung
    Replied about 1 month ago
    That wedding and honeymoon are so true. Spending that big amount of money for wedding and honeymoon are ridiculous. If you can afford it, sure go head and sped it. if not, don't put yourself into high bad debt. Is just a one day of happiness with no return. Sure will never forget that big beautiful wedding and also will never forget the amount money you spend.