What I Learned About Home Refinance - the Hard Way!

While I was taking a break from my article, How To Get Out of Debt Without Resorting To A Home Equity Loan or Mortgage Refinance, I started thinking about why I'm against home refinance deals. It has a lot to do with personal experience and the fact that I never solved my poor money management skills before refinancing my house.

In 2001, I had a high interest rate, but an inexpensive mortgage payment and 33% equity in my home. A couple of years later when I started running into financial trouble (because of bad spending habits and a roommate who wasn't pulling his weight), I decided to pursue refinancing to pay off some of my debts.

Property values had gone through the roof at that point and it seemed logical to pay off all my high-interest loans with a cash out refinance. I did get a lower variable interest rate, a good deal of cash out, and my new mortgage was a lot less monthly than my old mortgage plus other bills like my car loan. Sure, I gave up a good chunk of equity to cover the closing costs and fees, but I planned on building it back up.

Keep in mind though, even though it was less than my combined debt at the time, I was still paying higher mortgage payment every month. It's key to understanding the snowball process that eventually engulfed me. A couple more years went by and again I got into debt over my head again.

Since my partner was already trying to steer me away from my variable APR because interest rates were on the rise, I decided to do another refinance. My property value had increased quite a bit and I really needed the cash out to get my head above water again. The downside was that in order to get enough cash out, I had to pretty much borrow as much on the property as I possibly could. Again, I sacrificed a good deal of equity.

Now, two years later, I'm back in debt over my head, struggling with a current mortgage that nearly twice the size of my original, payments that are $300 a month more, and I have considerably less equity than I had when I first bought the house. Considering today's glutted housing market, especially with sub-prime loans stretched to the maximum, it's unlikely that I can refinance again to solve my current problems.

Bottom line: Don't refinance your mortgage to get out of debt unless you plan on changing the way you manage money first! Otherwise, you just get buried in an avalanche of debt.