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6 Months After Settling Sexual Harassment Claims, a Worker Faces the Consequences

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Sexual Harassment Claims
Illustration: Kelsey Wroten for MagnifyMoney

Chelsea Jones thought she’d feel relieved.

In the spring, Jones’ employer agreed to settle her claims that she was sexually harassed by her manager. The matter was handled out of court, and Jones is not allowed to discuss the terms of the settlement. She agreed to share her story with MagnifyMoney under the condition of anonymity. We have changed her name and other identifying details in this story.

Soon after her settlement was finalized, Jones tendered her resignation. It was the end of a months-long battle to convince her employer that her manager’s unrelenting advances — offers to rub her back, late night texts and weekend phone calls — were worthy of of retribution.

But it was hardly a victory. Six months later, Jones, a single mother of a young daughter, is cashing unemployment checks and struggling to find a new job. As far as she knows, her former boss is right where she left him.

“The worst part is that I second-guess myself now,” said Jones, reflecting on the harassment, which she said began after she received a promotion last year. “I’m a hard worker, and I feel like I do a good job. But what if I’m not? Was I really good, or was it always about something else?”

Coming forward

Whether the employee is a famous news anchor or an office assistant, reporting sexual harassment at work is never an easy battle to wage alone. It’s arguably more difficult for the average worker, who may not feel they have the professional clout or the financial means to take action. Workers filed roughly 6,800 sexual harassment charges through the Equal Employment Opportunity Office in 2015, down 14% since 2010.

For Jones, speaking up was only the first of many challenges she faced. While her attorney squared off against her company’s legal team behind closed doors, she continued coming to work each day, where she said she was subjected to an increasingly hostile environment.

Even filing a simple human resources complaint can be rife with complications, exposing workers to forms of retaliation that, while illegal, can make it difficult to muster the willpower to keep fighting.

“[Workers] can be fired or suffer other consequences,” said Gary Young, an attorney who specializes in workplace harassment issues at the business law firm Scarinci Hollenbeck. “Even if you have your day in court and are vindicated, it can be a long road and it’s tough to go through the process.”

No one understands that process better than Jones.

Jones was in her late 20s when she started working for the Boston-area firm in 2013. For Jones, it was something of a professional comeback. She had recently ended a marriage and went back to school to earn her Associate’s Degree. She was thrilled to be hired and eagerly accepted a promotion a couple of years later.

The new title came with a higher salary and, she soon discovered, an increasing amount of unwanted attention from her boss.

“We were at a conference together, and he was offering to give me a back massage, to put his arms around my shoulders,” said Jones, now 30. The advances continued for months. According to Jones, her manager insisted on buying her gifts on her birthday and began texting her late at night and on weekends. She asked her manager to stop his advances, to no avail.

Worried that her coworkers would get the wrong impression about their relationship, Jones decided to report his behavior to her human resources manager.

“I was hoping to resolve the issue [through HR], and change my position so I was no longer sitting outside of his office,” Jones told MagnifyMoney. “My goal wasn’t to file a lawsuit.”

Dead-ends and demotions

Illustration: Kelsey Wroten for MagnifyMoney
Illustration: Kelsey Wroten for MagnifyMoney

HR proved to be a dead end. As a solution, her HR manager offered to put Jones in an administrative role in another part of the company. The new job would have moved her out from under her manager’s purview, but it was effectively a demotion.

She turned the offer down. In the ensuing weeks, her boss increasingly began cutting back her job duties, she said. He yanked her budget for a previously approved work project. She was told she could no longer use support staff to see the project through.

At a loss for what to do, Jones posted a message on a Facebook support group for single working moms. A member referred her to an employment attorney in her area, who offered her a free consultation.

“He said I’m young and if I file a lawsuit it will become public record and it could hurt my future employment,” Jones said. She agreed to give it another try with HR.

When she submitted another complaint, Jones said she received a warning: HR had noticed her performance was slipping and her colleagues were complaining. It was clear she was getting nowhere.

Jones went back to the attorney, who agreed to take her case. The attorney compiled all of Jones’ allegations — she had documented every unwanted advance, phone call and text message from her manager over the years — and sent a letter to her company informing them of the pending lawsuit.

“Once [my boss] got the letter, obviously it made everything way more hostile,” she said. “He didn’t speak a single word to me. I was going [to work each day] having no work to do. Then they started putting me on odds and end jobs not even related to what I was supposed to do there.”

She considered quitting, but Jones’ attorney encouraged her to hang tight.

It can in some cases help workers in sexual harassment cases if they keep working, said Paula Brantner, an attorney with Workplace Fairness, a non-profit that promotes employee rights, says . “First of all, you are required to give the company a chance to rectify the problem,” Bratner said. Quitting before a complaint is resolved can also remove some of the bargaining power in settlement negotiations. Companies are often eager to keep matters like sexual harassment under wraps.

Staying on the job can also give workers the opportunity to keep track of any retaliatory behavior. Workplace harassment lawsuits are often stronger if workers can prove their employer retaliated against them after they took matters to human resources. In Jones’ case, she was offered a demotion and her job duties shrank.

“Even if the initial harassment claim fails, the retaliation claim can subject the employer to as much or more liability as the underlying harassment claim,” said Brantner. “Judges and juries don’t like to see people [follow proper protocol], only to be subjected to more injustice.”

When her attorney reached a settlement with her employer, Jones decided to accept.

“One of the reasons I accepted a settlement instead of going to trial is that I didn’t want to be publicly seen as a woman who files these claims,” she said.

Her allegations will never be made public, but the ordeal has effectively stymied the beginning of what was a promising new career. Jones is still looking for a new job.  She worries about using her former employer as a professional reference, despite the fact that it was her first significant job in her chosen profession. While she continues her job search, Jones is studying part-time to complete her Bachelor’s degree. Under the terms of her settlement, she was entitled to collect unemployment benefits, which has given her a bit of a financial cushion. Her settlement award remains in a savings account, untouched.

“My goal with the settlement wasn’t just to get some payday,” she said. “I’d like to think it was enough to make him stop [doing this to other women].”

Handling harassment at work

We’ve spoken with legal experts and put together some tips for workers who feel they are facing harassment at work.

Identify the unwelcome behavior. Brantner, who has represented workers in harassment lawsuits, says the first thing to do is to recognize when you are being sexually harassed. She says sexual harassment is defined as unwelcome sexual advances or verbal or physical conduct of a sexual nature that is made explicitly or implicitly a term of your employment. It can also be conduct that interferes with your work or creates a hostile work environment.

Report the behavior to your human resources department or other supervisor. When you’ve identified the unwelcome behavior, Brantner says the next step is to report it and ask that it stop. “If the behavior continues after you have clearly communicated that you wish it to stop, you need to decide if you wish to take further action,” she says.

Document everything. If you want to bolster your case, Young suggests documenting any evidence of harassment. Keep a log that includes dates and times, as well as descriptions of the offensive behavior. Note your attempts to speak with human resources and the outcomes. Save emails and written notes to back you up. In some states it is illegal to record conversations without the other person’s knowledge, so check your state’s laws or consult an attorney before you take that route.

Be on alert for any form of retaliation. Speaking up about harassment in the workplace can trigger retaliatory behavior from colleagues. It’s important to keep close track of anything your colleagues may do in order to undermine your position after you have spoken up about harassment. The person you are accusing of harassment might try to make it difficult for you to do your job, or, in Jones’ case, demote you or remove your job duties. Document these instances carefully in order to support your case.

If your employer doesn’t act, contact a lawyer or the EEOC. If you aren’t getting results with your employer, Young recommends visiting the Equal Employment Opportunity Commission (EEOC) website to learn about filing a charge. You can use the EEOC’s assessment tool to get a better idea of what to expect. It takes about five minutes to use the tool, and you will be directed as to your next course of action. Some states have rules on how much time can go by before harassment suits are filed. The EEOC can help you expedite the process if needed.

Money doesn’t have to mean everything. Even if you don’t have unlimited financial resources to hire a legal team, you still have options. Many lawyers will take on workplace harassment cases on a contingency basis, which means they are paid once you have a settlement or win the lawsuit. For example, Jones’ attorney accepted a percentage of her settlement earnings as payment and collected no other fees. If you file with the EEOC or the Department of Labor, or with the appropriate office in your state, the government will investigate if there is probable cause to pursue a lawsuit.

Edited by Mandi Woodruff
Illustrations by Kelsey Wroten

*Names, dates and locations have been changed. 

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Marcus by Goldman Sachs Review: GS Bank Takes on Online Savings, CDs, and Personal Loans

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Marcus by Goldman Sachs savings account

A very high interest rate and no fees make this one of the best savings accounts out there.

APY

Minimum Balance Amount

1.70%

None

  • Minimum opening deposit: None. However, you’ll need to deposit at least $1.00 if you want to earn any interest
  • Monthly account maintenance fee: None
  • ATM fee: N/A
  • ATM fee refund: N/A
  • Overdraft fee: None

This is a great account for almost anyone. However, before you click that “Learn More” button below, there are a couple of things to know.

No ATMs. First, Marcus by Goldman Sachs doesn’t offer ATM access to your savings account. You’ll either need to deposit or withdraw money by sending in a physical check, setting up direct deposits, or by moving the money to and from your other bank accounts via ACH or wire transfer.

No checking account. Second, Marcus does’t offer a corresponding checking account. That means you can only use this account as an external place to park your cash from your everyday money flow.

Keeping a separate savings account does have its benefits. For example, it’s harder to tempt yourself to withdraw the cash if you’re a chronic over-spender. But, it also means that there might be a delay of a few days if you need to transfer the money out of your Goldman Sachs online savings account and into your other checking account.

How to open a Goldman Sachs online savings account

It’s really easy to open an online savings account with Marcus by Goldman Sachs. You can do it online or over the phone as long as you’re 18 years or older, have a physical street address, and a Social Security Number or Individual Taxpayer Identification Number.

You’ll be required to sign a form which you can do online, or by mail if you’re opening the account over the phone.

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How their online savings account compares

Marcus’ online savings account can easily be described with one word: outstanding.

You’ll get a relatively high interest rate with this account, which is among the best online savings account rates you’ll find today. In fact, these rates are currently over seven times higher than the average savings account interest rate.

Even better, this account won’t charge you any fees for the privilege of keeping your money stashed there. It’s a tall order to find another bank that offers these high interest rates with terms this good.

Marcus by Goldman Sachs CD rates

Sky-high CD rates, but watch out for early withdrawal limitations.

Term

APY

Minimum Deposit Amount

6 months

0.60%

$500

9 months

0.70%

$500

12 months

2.05%

$500

18 months

2.05%

$500

24 months

2.10%

$500

3 years

2.10%

$500

4 years

2.10%

$500

5 years

2.15%

$500

6 years

2.20%

$500

  • Minimum opening deposit: $500
  • Minimum balance amount to earn APY: $500
  • Early withdrawal penalty:
    • For CDs under 12 months, 90 days’ worth of interest
    • For CDs of 12 months to 5 years, 270 days’ worth of interest
    • For CDs of 5 years or over, 365 days’ worth of interest

Marcus’ CDs work a little differently from other CDs. Rather than having to set up and fund your account all at once, Goldman Sachs will give you 30 days to fully fund your account.

Once open, your interest will be tallied up and credited to your CD account each month. You can withdraw the interest earned at any time without paying an early withdrawal penalty, but heads up: If you withdraw the interest, your returns will be lower than the stated APY when you opened your account.

If you need to withdraw the money from your CD, you can only do so by pulling out the entire CD balance and paying the required early withdrawal penalty. There is no option for partial withdrawals of your cash.

Finally, once your CD has fully matured, you’ll have a 10-day grace period to withdraw the money, add more funds, and/or switch to a different CD term. If you don’t do anything, Marcus will automatically roll over your CD into another one of the same type, but with the current interest rate of the day.

How to open a Goldman Sachs CD

Marcus has made it super simple to open up a CD. First, you’ll need to be at least 18 years old, and have either a Social Security Number or an Individual Taxpayer Identification Number.

You can open an account easily online, or call them up by phone. You’ll need to sign an account opening form, which you can do online or via a hard-copy mailed form. Then, simply fund your CD account within 30 days, and you’re all set.

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How their CDs compare

The interest rates that Marcus offers on their CDs are top-notch. In fact, a few of their CD terms are among the current contenders for the best CD rates.

If you’re interested in pursuing a CD ladder approach, Marcus is one of our top picks because each of their CD terms offer above-average rates. This means you can rest easy that you’ll get the best rates for your CD ladder without having to complicate things by spreading out all of your CDs among a handful of different banks.

The only downside to these CDs compared with many other banks is that you can’t withdraw a portion of your cash if you need it. It’s either all-in, or all-out. However, once out, you’re still free to open a new CD with the surplus cash, as long as it’s at least the $500 minimum deposit size.

Marcus by Goldman Sachs personal loan

Personal loans offered by Marcus have low APRs, flexible terms, and no fees.

Terms

APR

Credit Required

Fees

Max Loan Amount

36 to 72 months

6.99%-28.99%

Not specified

None

$40,000

Marcus by Goldman Sachs® personal loans can be used for just about anything, from consolidating debt to financing a large home improvement project. They offer some of the best rates available, with APRs as low as 6.99%, and you’ll not only be able to choose between a range of loan terms, but you can also choose the specific day of the month when you want to make your loan payments.

While there are no specific credit requirements to get a loan through Marcus, the company does try to target those that have “prime” credit, which is usually those with a FICO score higher than 660. Even with a less than excellent credit score, you may be able to qualify for a personal loan from Marcus, though, those that have recent, negative marks on their credit report, such as missed payments, will likely be rejected.

Applicants must be over 18 (19 in Alabama and Nebraska, 21 in Mississippi and Puerto Rico) and have a valid U.S. bank account. You are also required to have a Social Security or Individual Tax I.D. Number.

No fees. Marcus charges no extra fees for their personal loans. There is No origination fee associated with getting a loan, but there are also no late fees associated with missing payments. Those missed payments simply accrue more interest and your loan will be extended.

Defer payments. Once you have made on-time payments for a full year, you will have the ability to defer a payment. This means that if an unexpected expense or lost job hurts your budget one month, you can push that payment back by a month without negatively impacting your credit report.

How to apply for a Marcus personal loan

Marcus by Goldman Sachs offers a process that is completely online, allowing you to apply, choose the loan you want, submit all of your documents, and get approved without having to leave home. Here are the steps that you will complete to get a personal loan from Marcus:

  1. Fill out the information that is required in the online application, including your basic personal and financial information, as well as how much you would like to borrow and what you will use the money for.
  2. After a soft pull on your credit, and if you qualify, you will be presented a list of different loan options that may include different rates and terms.
  3. Once you have chosen the loan you want, you will need to provide additional information to verify your identity. You may also be asked for information that can be used to verify your income and you will need to provide your bank account information so that the money can be distributed.
  4. You will receive your funds 1 – 4 business days after your loan has been approved.

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How their personal loans compare

Marcus offers low APRs and flexible terms with their personal loans, but their main feature is that they have no fees. If you are looking for a straightforward lending experience with no hidden fees or costs, Marcus will be perfect for you since you won’t even have to worry about late fees if you happen to miss a payment.

While Marcus offers some great perks, you may be able to get a lower rate if you choose to go with another lender, such as LightStream or SoFi. Both of these lenders offer lower APR ranges and they don’t charge origination fees, though, LightStream will do a hard pull on your credit to preapprove you.

LendingClub and Peerform both have lower credit requirements than Marcus, but they also charge origination fees and, being P2P lending platforms, you will need to wait for your loan to be funded and you run the risk that other users might not fund your loan.

Overall review of Marcus by Goldman Sachs‘ products

Marcus has really hit it out of the park with their personal loans, online savings, and CD accounts. Each of these accounts offers some of the best features available on the market, while shrinking the fees down to a minuscule, or even nonexistent, amount. Their website is also slick and easy to use for online-savvy people.

The only thing we can find to complain about with Marcus is that they don’t offer an equally-awesome checking account to accompany their other deposit products. Indeed, it seems like Marcus has turned their former hoity-toity image around: Today, they’re a bank that we’d recommend to anyone, even blue-collar folks.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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How to Refinance Your Mortgage to Save Money and Consolidate Debt

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Happy black couple standing outside their house

Refinancing your mortgage, which is the process of paying off your existing home loan and replacing it with a new loan, can save homeowners money. But before you consider a mortgage refinance, you should understand how much it costs and what the process entails.

In this guide, we’ll explore how to refinance a mortgage, how much it costs to refinance and how to decide whether you should refinance at all. We’ll also discuss the refinancing process and offer comparison-shopping tips.

How to refinance your mortgage

Before we cover the steps you need to take to refinance a mortgage, we first need to understand the different refinance options available. Below is a table of the types of refinances and the process involved for each in refinancing your mortgage.

Types of mortgage refinances

Refinance Type

How Does It Work?

Cash-out A way to borrow against your available equity. You take out a new mortgage with a larger balance than your existing loan and pocket the difference in cash.
Limited cash-out The refi closing costs and fees are financed into the new loan, and you may receive a small amount of cash — not to exceed 2% of the loan amount or $2,000, whichever is lower — when the closing documents are reconciled.
No cash-out Also called “rate-and-term” refinance. You refinance your existing loan balance to improve your loan terms by securing a lower mortgage rate or switching mortgage types, for example. You can either pay your closing costs and fees out of pocket or finance them into your new loan.
Streamline A refinance with limited documentation and underwriting requirements. The goal is to lower your monthly mortgage payment. Streamline refinances are available on government-backed mortgages through the FHA, USDA and VA.

Step-by-step guide to shopping for a mortgage refinance

Before you start shopping for a new mortgage, arm yourself with knowledge. First, check mortgage refinance rates in your area online.

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It’s good to know what the best rates are, but it’s even better to know if you’ll qualify for them. About six months before you plan on applying for a refinance, pull a copy of your credit report from each of the three major credit reporting bureaus — Equifax, Experian and TransUnion. Review your reports for accuracy and dispute any errors you find. You’ll also want to access your credit scores to see where you stand.

Aim for a score of 740 or higher to qualify for the lowest mortgage rates. You can still qualify with a lower credit score, but the lower your score, the higher your interest rate will be. We offer separate tips on how to refinance a mortgage with bad credit.

Choose your rate type
Decide which rate type works for you. For example, do you have an adjustable-rate mortgage and want to switch to a fixed-rate mortgage? Mortgage rates might be lower now, but eventually they’ll increase. If you have a 5/1 ARM, your mortgage rate is fixed for the first five years, but will adjust annually thereafter. Unless you know with certainty you can afford your monthly payments when your rate starts rising, or you aren’t planning to stay in the home for long, an ARM is risky.

If you don’t want to gamble with your monthly mortgage payment, stick with a fixed-rate mortgage. Your rate will be locked in for the life of your loan.

Gather multiple quotes

As with most shopping endeavors, the best way to find the best price is to get quotes from multiple mortgage lenders in your area.

There are two primary criteria for you to consider. The first, of course, is interest rates. The second is fees, which can eat into your savings.

It’s easy to take the path of least resistance and refinance with your current lender, which may offer you lower fees than their competitors. But the interest rates offered by your current lender may be higher than what’s available with other lenders. Get outside quotes to use as leverage for negotiations.

Or maybe your lender is offering you lower fees and interest rates than the competition, but the rate is still higher than you’d like it to be because of a less-than-perfect credit score. While doing so doesn’t have a high success rate, you can try negotiating for a lower rate based on customer loyalty.

Prepare your documents

Gather these commonly required documents before approaching your lender to ensure the application process goes as smoothly as possible:

  • Personal information: Be prepared with your Social Security number, driver’s license or other state-issued ID, and the addresses you have lived at for at least the past three years. Lenders are required to verify your identity before lending you any money or allowing you to open any type of financial account.
  • Accounting of debts: Statements for any outstanding credit card balances or loans you may have, including your current mortgage.
  • Proof of employment and income: Last two to three months’ worth of pay stubs, employer contact information, including anyone you’ve worked for in the past two years, W-2s and income tax documents for the past two years and/or additional documentation of income for the past two years for self-employed individuals, including schedules and profit/loss statements.
  • Proof of assets: A list of all the properties you own, life insurance statements, retirement account statements and bank account statements going back at least three months.
  • Proof of insurance: This generally refers to homeowners insurance and title insurance.
  • Additional documents: If you receive income from disability, Social Security, child support, alimony, rental property, regular overtime pay, consistent bonuses or a pension, be sure to provide documentation for these income sources as well.

There may be additional documents required depending on your lender, but checking off this list is a great start.

Apply for the refinance

Once you’ve done your homework and gathered all your information, apply for the refinance with the lender you’ve selected.

How long does it take to refinance a mortgage?

The full process of being approved for a mortgage refinance typically takes between 20 and 45 days if you submit your paperwork in a timely manner. It will require hard pulls of your credit reports and scores, along with the submission of personal documentation.

Approval
A loan officer will look over your paperwork, which will hopefully end in approval. You’ll then be sent documents to review. It would be wise to do so with a lawyer, which is an additional fee you’ll want to consider as part of your refinancing costs.

Closing
If everything checks out and you agree to your new loan terms, then it’s time to finalize the deal with your mortgage closing. If you didn’t finance your closing costs and fees as part of your new loan, you’ll pay for them at closing time. Depending on the lender, you’ll sign your documents in person, through postal mail or online. After the paperwork is processed, your current mortgage will be paid off and your refinanced mortgage will take effect.

Should you refinance your mortgage?

There are many reasons you might consider refinancing your mortgage. For example, interest rates could have dropped significantly since you first bought your house. You may also have a growing list of home repairs that need to be addressed, or high-interest credit card or student loan debt to consolidate, and a refinance can help you achieve those goals.

But are any of these good reasons to refi? To decide, you need to factor in the cost of refinancing a mortgage, along with some other considerations. We’ll weigh the pros and cons of refinancing for various goals below.

Refinancing to lock in a lower mortgage rate

Mortgage interest rates have been historically low for a while. As of mid-September 2019, the average interest rate on a 30-year fixed-rate mortgage was 3.56%, according to Freddie Mac’s Primary Mortgage Market Survey. During the same week in 2018, the average rate was 4.6%. If your original mortgage rate is higher than 4%, it might make sense to explore your refinance options, since a lower interest rate can save you money over time.
See the table below for an illustration of how a lower interest rate can reduce the overall cost of your mortgage.

 Existing mortgage New mortgage

Loan amount

$290,921.36 $290,921.36

Years remaining on term

28 years 30 years

Interest rate

5%4%

Monthly payment
(principal and interest)


$1,610.46 $1,388.90

Total interest paid
(over 30 years)


$279,767.35 $209,083.75

Let’s say you’re refinancing a 30-year mortgage you undertook two years ago, and you now qualify for a mortgage rate that’s a full percentage point lower than your current rate — you’re going from 5% to 4%. Although a refinance will mean it will take longer to pay off your loan, the trade-off is the money you’ll save. Based on the table above, your new mortgage rate would lower your monthly payment by $221.56 and cut down your interest payments by more than $70,000 over the life of the loan.

How much does it cost to refinance a mortgage?

The savings sound promising, but hold your enthusiasm. Don’t forget to answer this key question before moving forward: How much are the closing costs to refinance a mortgage?

A refinance comes with closing costs and fees that could range from 3-6% of the new loan amount. Charges usually include escrow and title fees, document preparation fees, title search and insurance, loan origination fees, flood certification and recording fees. On a nearly $291,000 mortgage, these expenses could add up to more than $8,000 or more.

In order to truly save money through refinancing, you’ll need to determine your break-even point, which is the amount of time it will take for your monthly payment savings to cover the costs you paid for the refinance. Using the numbers above, we would need to divide the estimated closing costs — let’s just use $8,000 in this example — by the $221.56 monthly payment savings. The math tells us it would take about 36 months — or three years — to break even. If you don’t plan on staying in your home for at least three years or longer, you should probably keep your existing mortgage.

Refinancing to lower your mortgage payments

If you’re thinking about refinancing to lower your monthly mortgage payments, you should understand that while you’ll pay slightly less every month, the amount you pay over the life of your loan will increase.

Refinancing simply to lower your monthly payment can be dangerous during the first five to seven years of paying off your current mortgage. That’s because interest charges are not spread out evenly over the course of your loan — they are front-loaded. That means for those first several years, you’re paying more toward interest than your principal loan balance. In the meantime, you’re building very little equity. If you refinance during this time frame, you’re starting the clock over and delaying the opportunity to establish equity.

Revisiting our previous example, let’s say instead of refinancing your 30-year, $300,000 mortgage after a couple of years, you waited until you were 10 years into the loan to refinance. Your goal is to lower your monthly mortgage payment, but in order to get the payment as low as you want, you extend your loan term by 10 years and start over with a new 30-year mortgage.

On your existing mortgage, nearly $600 of your monthly payment goes toward paying down your principal by year 10. If you were to start over, the amount you’d pay toward principal drops down to less than $400 for the first few years.

Refinancing to make home improvements

Some homeowners choose to pay for home improvements by refinancing a mortgage, especially if they don’t already have the cash on hand.

Cash-out refinance

One way to do that is through a cash-out refinance, which is when you borrow a new mortgage with larger balance than your existing mortgage. The difference between the two loans is given to you in cash. That available cash comes from the equity you’ve built from paying down your existing mortgage.

A cash-out refinance could work for you if you have built a significant amount of equity in your home. Most lenders limit the maximum loan-to-value ratio — the percentage of your home’s value that is financed through your mortgage — for cash-out refinances to 80%.

Choosing a cash-out refinance could make more financial sense than borrowing a personal loan or putting repairs on a credit card, since refinance interest rates are typically lower than those alternatives.

HELOC

Another option is to borrow a home equity line of credit (HELOC). This functions similarly to a credit card; you have a line of credit up to a set amount and only pay for what you borrow, plus interest. However, because a HELOC is secured by your home, interest rates are typically much lower than on credit cards. However, rates are generally variable and not fixed, which could cause problems later if you’re carrying a large balance on your HELOC and interest rates go up.

HELOCs usually have a draw period, when you’re allowed to borrow against the credit line, and a repayment period, when you can no longer borrow and are only repaying what you owe. During the draw period, the required minimum payments usually just cover the interest, but during the repayment period, you’ll have to make principal and interest payments that will likely be much higher than your interest-only payments — especially if your outstanding balance is high.

Either way, you should be cautious. Making an upgrade for the sake of functionality is one thing, but making an upgrade for the sake of luxury is another. If you’re thinking about tapping your equity to pay for a major project that may not boost your home’s value, it might not be wise to do so. If the luxury is something you really want, don’t finance it — save up for it.

Refinancing to consolidate debt

You might be tempted to use a cash-out refinance to pay off credit card balances or other high-interest debt. With mortgage interest rates hovering near historic lows, taking this route may seem like a good idea. After all, rolling your debt into a mortgage with a 4% interest rate is better than paying it off at 15% interest or higher, isn’t it?

Credit cards

There are some instances where rolling your credit card debt into a mortgage refinance can be advantageous. For example, if you’re in a dual-income household and you lose a spouse without adequate life insurance, you may find yourself in a financial bind.

In this scenario, if you have credit card debt in your own name and suddenly can’t afford to pay the monthly bills, refinancing your mortgage and cashing out a portion to pay off your debt may be one of the few feasible options.

Let’s say you owe $20,000 in credit card debt at a 15% interest rate. If you pay off that balance over the next five years, you’ll pay more than $8,500 in interest. However, if you add that same balance to a mortgage with a 4% interest rate, although you’re increasing your loan amount, you’ll likely pay less interest than if you kept the debt on your card.

Outside of scenarios similar to the one mentioned above, refinancing your mortgage to consolidate credit card debt often doesn’t get to the root cause of the issue. If you had a spending or cash flow problem prior to your mortgage refinance, you’re likely to end up in debt again. But this time, you’ll have a bigger mortgage to handle on top of the extra debt.

Instead of borrowing a bigger mortgage to get rid of your credit card debt, consider applying for a balance transfer credit card. Though these cards come with balance transfer fees, they can be as low as 3%, and you only have to pay them once. Many cards include an initial 0% interest offer on balance transfers for the first 15 months or longer. Because there is a deadline on the 0% interest period, you’ll likely find the motivation to pay the debt off quickly and build better financial habits along the way.

Student loans 

If you have student loan debt that could take decades to repay, refinancing your mortgage to access the cash you need to pay off that debt could potentially be a smart idea.

Fannie Mae, one of the two mortgage agencies that buy and sell mortgages from lenders that conform to their guidelines (the other agency is Freddie Mac), has a “student loan cash-out refinance” option that allows borrowers to refinance their mortgage and cash out a portion of the new mortgage to pay off student loans.

Let’s say you owed $30,000 on your home and had $20,000 in outstanding student loan debt. You would take out a new $50,000 mortgage, with $20,000 of it paying off your debt.

Going this route could make sense if the interest rate on the refinance is less than the interest rate on your student loans. Additionally, if you sell your home, the proceeds should take care of the portion of your mortgage that was dedicated to paying off your loans.

The drawback of refinancing to consolidate or pay off debt is that not only do you increase your mortgage balance — you lose your available equity. Be sure to weigh the pros and cons before tapping your equity.

The bottom line

A mortgage refinance can save you money, cut down on your interest payments or give you access to cash, but be sure you’re clear on why you’re refinancing and whether it makes sense.

If you’re refinancing to extend your loan term by several years and dramatically lower your mortgage payments, or remodel your kitchen to something of a chef’s dream, reconsider. But if you’re looking to snag a lower mortgage rate on a loan for which you’ve built significant equity, refinancing may be beneficial.

Before signing on any dotted lines, reach out to your loan officer, ask questions and run the numbers.

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