The sting of regret runs deep. You know the feeling if you've ever bought a stock because it was hot, and then watched its value go tumbling down. A poorly planned mortgage refinance can end up the same way, and you could be a lot poorer and your ego a lot humbler.

Mortgage refinancing is a complex transaction that rarely has a no-lose outcome. Usually, a refinance will increase your total interest costs, extend your pay-off date, and generally make it harder for you to own your home free and clear. Minimally, you'll incur some upfront costs associated with the transaction. Get some peace of mind before you proceed by checking your motivations against these four worst reasons to refinance.

Lowering your payment

A lower payment is a popular reason to refinance, but it's not always a good reason. Figure out if a lower payment will actually help you by calculating the potential monthly savings, and dividing this amount into your estimated closing costs. The resulting figure will tell you how many months you'll have to pay on the refinance before you break even on the closing costs.

Next, consider all the factors that could force you to move between now and the breakeven date. Only proceed with the refinance when you're certain that your home and work situations are relatively stable.

Keeping up with the Joneses

Your neighbors may have refinanced to build a lovely new kitchen. But most normal people, including you, can still cook dinner without a commercial grade stovetop. Resist the urge to refinance "just because." If you must refinance and remodel, proceed with a focus on increasing the value of your home-which is different from designing a kitchen that will impress your neighbors.

Putting off budgeting

Are you squeezed by your monthly expenses? Don't assume a refinance is the answer. A wiser strategy is to run the numbers and identify the real source of your troubles. Is it simple over-spending or mismanagement of credit cards? Refinancing for a lower payment, or to consolidate debt, may provide the breathing room you need. But if you avoid addressing the underlying problem, you'll continue to spend more than you make. That leads to another refinance and another, until your only option becomes bankruptcy.

Buying something you can't afford

You certainly could fund a Bora Bora vacation with a cash-out refinance, but it's a risky financial move. For one, you're putting your house on the line for an unnecessary, one-time purchase with short-lived pleasure. Refinancing is better suited for investments that return value over time, such as a home remodel or a college education. A vacation never adds value and only dilutes your wealth. A second problem with luxury purchases is that they tend to make regular purchases seem inadequate. Take a trip to Bora Bora once, and you'll likely be tempted to do it again. You're better off avoiding luxury purchases entirely, unless you enjoy a luxury income.

Keep your wealth and your ego intact by proceeding cautiously on your mortgage refinance. A regretful refinance cannot be undone. It can only be replaced with more of the same.

Published on November 12, 2010