7 bad reasons to refinance (© Jeffrey Coolidge/Getty Images)

© Jeffrey Coolidge/Getty Images

When mortgage rates dip and the office chatter focuses on who snagged the lowest interest rate, it can be tempting to contact a lender and sign on for a mortgage refinance. But before you begin the long process of gathering pay stubs and bank statements, think about why you want to refinance. Refinancing can help with some financial goals, such as easing your monthly cash flow or paying off your home loan, but if your motivation to refinance is one of these seven reasons, maybe you should rethink:

1. Consolidating debt
This can be one of the most dangerous financial moves any homeowner can make. On the surface, paying off high-interest debt with a low-interest mortgage seems like a smart move, but there are some potential problems. First, you would be transforming unsecured debt, such as credit-card debt, into debt that is backed by your home. If you can't make home-loan payments, you can lose the home. While nonpayment of credit-card debt can have negative consequences, they are usually not as dire as foreclosure.

Second, many consumers find that once they have repaid their credit-card debt, they are tempted to spend again and will build up big balances that they will have more trouble repaying.

2. Moving to a loan with a longer term
While refinancing into a mortgage with a lower interest rate can save you money each month, be sure to look at the overall cost of the loan. If you have 10 years left to pay on your current loan and you stretch out the payments into a 30-year loan, you will pay more in interest overall to borrow the money and be stuck with 20 extra years of mortgage payments.

3. Saving money for a new home
As a homeowner, you need to make an important calculation to determine how much a refinance will cost and how much you will save each month. If it will take three years to recoup the expenses of a refinance and you plan to move within two years, then you are really not saving any money.

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4. Switching from an adjustable-rate to a fixed-rate loan
This can be an excellent move if you intend to stay in the home for years. But if you are simply afraid of the bad reputation of an adjustable-rate mortgage, you should look carefully at the ARM terms before refinancing. Make sure you know what index the ARM is tied to, how often your loan adjusts and, even more important, your caps on the loan adjustments: the first cap, the annual cap and the lifetime cap. It may be that a fixed-rate loan is better for you, but make sure you do the math before committing to spending money on a refinance.

5. Taking cash out for investing
The problem with cash is that it is too easy to spend. If you are disciplined and will truly use the extra money for investing, this can be a good option. However, paying down a mortgage at 5% to 6% per year can be a better deal than plunking your cash into a certificate of deposit that earns 2% every year. Make sure you are a savvy investor before playing with the equity in your home.

6. Reducing your payments
In general, reducing your monthly payments by lowering your interest rate makes financial sense. But don't ignore the costs of refinancing. In addition to the closing costs and fees that range from 3% to 6% of your home loan, you will be making more mortgage payments if you extend your loan terms.

For example, if you have been making payments for seven years on a 30-year mortgage and refinance into a new 30-year loan, remember that you will be making seven extra years of loan payments. The refinance may still be worthwhile, but you should roll those costs into your calculations before making a final decision.

7. Taking advantage of a no-cost refinance
A "no-cost" mortgage loan does not exist. There are several ways to pay for closing costs and fees when refinancing but, in every case, the fees are paid one way or another. Homeowners can pay cash from their bank account for a refinance or they can wrap the costs into their loan and increase the size of their principal. Another option is for the lender to pay the costs by charging a slightly higher interest rate. You can calculate the best way for you to pay the costs by comparing the monthly payments and loan terms in each scenario before choosing the loan terms that work best for your finances.