Mortgage Refinancing - How Lenders Determine How Much Mortgage You Qualify For

Mortgage refinancing can be a slippery slope to never-ending debt. It's important to keep this in mind when considering refinancing for the purpose of tapping into home equity or consolidating debt.

Homeowners often access the equity in their homes to cover big expenses, such as the costs of home remodeling or a child's college education. These homeowners may justify such refinancing by pointing out that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source. Another justification is that the interest on mortgages is tax deductible. While these arguments may be true, increasing the number of years that you owe on your mortgage is rarely a smart financial decision, nor is spending a dollar on interest to get a $0.30 tax deduction.

Many homeowners refinance in order to consolidate their debt. Taking out extra cash during a refinancing to pay off credit-card debt is a popular tactic these days—and a huge potential mistake. You've turned what should be short-term debt into long-term debt, which can cost you more in the long run despite the tax advantages from being able to write off the interest. If you transfer $15,000 in credit cards to a new 30-year first mortgage, your monthly payments will be lower but it's costing you more to pay off the revolving credit debt because of the lengthy term of the loan.

If you can swing it, you're better off taking 10 years to pay off the charge cards because it will save you 20 years' worth of additional interest.

Unfortunately, refinancing does not bring with it an automatic dose of financial prudence. In reality, a large percentage of people who once generated high-interest debt on credit cards, cars and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so. This creates an instant quadruple loss composed of wasted fees on the refinancing, lost equity in the house, additional years of increased interest payments on the new mortgage and the return of high-interest debt once the credit cards are maxed out again—the possible result is an endless perpetuation of the cycle of debt.

People who take out money to pay off credit cards and have no intention of changing their credit card behavior are at the top of the list of people who should not refinance.

When already in financial trouble, secured loans greatly increase the risk that you may lose your home. Alternatives should be considered such as reducing current expenses and increasing current income.