If you haven’t read about it already, went through a really rough period with our finances. We’d helped my mom through her very expensive divorce, I’d recently switched careers, and we underestimated how expensive babies can be.

We were maxed out on every debt option possible and had gotten to the point where we couldn’t handle making the monthly minimum payments on all our obligations.

It was awful. One stroke of perfect timing, luck, and equity kept us afloat and allowed us to get back on our feet financially. We took advantage of the housing market increase and decided to refinance our mortgage to help us get out of debt.

Whether or not that was the best decision for us wasn’t even a consideration. We were desperate. None of the research in the world would have mattered because I didn’t even have time for that. I needed the refinance to clear before the next payment on any of my credit cards became due.

Things worked out well, and my panic soon became a strong sense of confidence that I really COULD get us out of this hole. Looking back, I’m not 100% happy about that decision, but it saved our buns at the time, so I’m thankful it was an option.

Just because it worked out for us, doesn’t mean it’s the best idea for you or that I’d recommend it broadly. There are many caveats that I wish I knew to look out for.

Since I have experienced that feeling of panic, knew that I was uneducated about the process, and that I didn’t have the time or the mental space to dive into the details, I felt strongly about putting this resource together for you so that you’ll have the chance to reference these details and have a comprehensive resource if you’re ever facing this decision.

What to Watch Out For

The first and biggest mistake made when refinancing is only considering a single factor. Whether you focus on just the rate, only the payment, you narrow in on the term, or any other single factor, something else is going to slip by. 

When considering probably the largest transaction in your entire financial life you’ve got to look at the whole picture. Here are several variables to consider:

The Rate:

I know I’m not the only one who gets those robo calls that say if you’re rate is above X, then you could save by refinancing. We’ve got to be wiser than the robot voice and recognize that’s a sales tactic through and through. 

If you hear that the interest rates dropped and are tempted to refinance just to save 1 or 2 percent, without consideration of any other details, you may actually be spending more on your mortgage than you ever intended because of fees, a longer loan term, or even private mortgage insurance on your loan that aren’t necessarily pointed out to you. 

The Term: 

Usually refinancing is a pitched as a way to lower your monthly payment and save money each month. What they don’t tell you is that they are likely stretching your loan an additional X number of years while rolling refinance and title fees into your loan, which actually costs you more in the long run. 

If you’ve already paid 5 years on a 30 year mortgage, you only have 25 years left. When you refinance to reduce the payment, you’re likely getting a new 30 year loan, adding 5 additional years of payments on the backend. 

The Points:

This is probably the most confusing, strange thing of all, and honestly you’re not alone if you just glaze over right now. Try not to though, it’s important you just have a surface understanding of all the elements. 

Points are interest rate percentage points that have an assigned dollar value. You can “buy” a lower rate by adding lender-set fee amounts onto your loan amount in exchange for a lower rate. This gets complicated quickly, so I’d recommend avoiding the whole points-thing if at all possible. 

The Fees:

Whether or not you have to pay the fees out of pocket, there are thousands of dollars in processing, administrative, and legal fees associated with any large financial transaction. Appraisals, underwriters, and processors have to be paid, and guess who pays for them? The consumers – you and I. 

I know for a fact that our refinance fees were rolled into our loan, because we definitely didn’t have the cash to pay for them, which is yet another selling point that the companies use to convince you that refinancing is a great idea. 

What Really Happened

The items above are some of the more obvious components of the whole refinance picture. Something that’s often overlooked is that when you take cash out like I did, you’re often solving a short term problem with a long term solution.

My credit card debt didn’t go away, I just consolidated it and agreed to pay for it over the next 15 years at a set interest rate.

In addition, we have less equity in our home after refinancing because of the cash we took out. Effectively, the refinance resulted in us owning our home less, which isn’t a great long term wealth-focused decision. I’m just glad that I had the sense to push for a 15 year loan instead of the longer options. 

Did you know it’s actually possible to refinance over and over again? This, theoretically, would result in you never actually owning your home outright. Plus, who knows how much money in interest and fees would be wasted!

Another Major Consideration

The second and extremely common mistake people make when refinancing is miscalculating the payback period. The “payback period” is just a complicated way of saying that point where you’ve saved enough cash with your new loan to make it worth all the fees you paid. 

You’ll want to make sure you’re going to be in the home long enough to make it worth the thousands of dollars in fees you’ll pay to refinance the place. This is often calculated by looking at the amount you save on interest each month with the new loan. 

Don’t go without using some of the helpful spreadsheets here. Not only are you able to see the savings each month, but also the interest you’ll pay over the life of the loan and more – all of which you want to be sure are beneficial factors before going through with the refinance process.

So When Is Refinancing a Good Idea?

One great reason to refinance is to drop PMI (Private Mortgage Insurance) off your original loan. This can be a couple hundred dollars off your monthly payment that has no benefit to paying down your loan. 

Usually new buyers who put a small percentage down (less than 20%) will automatically have PMI added to the loan as a requirement to protect the lender. But no one will wave a bright colored flag and let you know when you’ve paid down the balance enough to have it removed. 

This is one of those things in life where you just have to pay attention and help yourself.

Another reason to refinance would be to save money in the long run. This is typically done by any combination of a multiple factors – shortening the term, lowering the rate, and/or the payment. 

Use these fantastic online calculators to really get clear on how much money you’d save using all of the factors. Remember to keep your vision wide and carefully consider them all. 

As I shared above, we refinanced to get out of debt. We felt like we were drowning and this was one way that we could gain traction and feel in control again. I quickly learned that refinancing was a small part of the financial equation and that my behavior as a consumer was actually the most important. 

If your life situation has changed drastically and you’re able to qualify for a better loan based on a higher income and a better credit score, you might consider refinancing. 

Over time, in general, we get raises, we make progress on paying off consumer debt, and our credit history matures. If it’s been a while and you now have a much better financial life from when you originally bought the home, it might be time to check if refinancing would benefit you.

There Won’t be a “Next Time”

Now that I’m deep in the weeds in the personal finance space, I know all the ins and outs of refinancing, when you should and shouldn’t, risks, and factors associated with being approved. Did I know any of that then? No, but maybe a little research would have helped.

We leveraged something tangible that we own for an intangible like credit card debt. Now my focus is on raising my kids to be responsible humans and paying off the mortgage. We have about 7 years left of payments at our current income, rate, etc.

So, while I’m happy to know all of this now, it won’t really benefit me. But I can help you by sharing what we did, why, and what I learned. If you’ve learned anything, I hope it’s that you should know your numbers. Know your rate, how long you have left, and what your real goals are.

Often I get wrapped up in financial goals, after all, that’s what I love and where I thrive. But step back and look at your life goals and then figure out how your finances fit into that picture and what you need to do to get there. Every choice we make is either making us healthier or not, wealthier or not, and happier or not.