5 Reasons Why You May Want To Avoid Mortgage Refinancing
Last time, we had a look at five reasons for considering taking out a mortgage refinance loan. The most obvious answer, taking advantage of lower interest rates, is top of the list. But saving money isn't everything and, sometimes, you might want to hold back or even pass on even thinking about mortgage refinancing.
The reasons for delaying are not as obvious as some of you think. So, with that thought in mind, let's take a look at five pitfalls that should have you running for the hills with your money still in your pocket.
You Have Bad Credit
Even minor damage to your credit rating can have a huge impact on the percentage rate your lender is prepared to loan money at. We know money is tight but, seriously, do you want to run the risk of even higher payments in return for a short term fix?
If you have a habit of missing mortgage payments or defaulting on loans, the chances are you'll be hit even harder with what seem like punitive interest rates.
Sometimes, it can be better to wait for the effects of minor infractions to be removed from your rating score. This usually takes 2 years. Alternatively, you might want to speak to a credit repair agency before you leap into a new financial fire.
You Don't Intend To Reside In The House For Long
With interest rates at all-time lows, it's easy to understand why so many people are grabbing every opportunity to reduce their costs via refinance packages. But one thing you must consider is how long you're going to stay in your home.
Think about where you expect to break even. This is the point at which your equity is greater than the cost you'll bear for closing down your loan. Make sure you factor in any fees that need to be repaid to your lender.
Here's a quick example: Let's say your mortgage is about $250,000. When you remortgage you save yourself $70 off your repayments but your total fees come to $5,000. Doing some quick calculations, we can see, thanks to the costs and fees, it takes just under six years to recoup the costs via your loan reductions. You'd be losing money.
Yes, we are greedy. We're human beings and it's in our nature to want to get our hands on as much as can as quick as we can. That's not always a bad thing but it may have an impact on your ability to keep a roof over your head.
We've all been taught that we should aim to have the nice things in life. In most cases, we need to pay money to get our hands on these things but blowing your equity on a new car because, 'you deserve it' might not be the best idea.
We've already spoken about the time you expect to stay in your home and the greed factor ties in with this point. Taking your equity for home improvements is fine but only if it's going to increase the value of your home. For example, adding an extra bedroom to your house might cost $50,000 but, depending on the area you live in, only raise the value by $30,000.
The Value Of Your Home Has Dropped
Unless you're incredibly lucky or amazingly shrewd, the chances are that the value of your home will have fluctuated. It's not a good feeling to know your home is worth less than when you bought it but, if it's any consolation, many of us are in the same boat.
Sadly, the lenders are very sensitive about who they give their money to. If value of your home has dropped, especially below the original purchase value, then you might have a struggle getting a lender to give you the rates you want and need.
An example: You bought your house for $400,000 five years ago. At the time, the bank was prepared to offer you a 5.125% adjustable mortgage which now has a balance of $290,000. But your home is now valued at $350,000. Your lender is only prepared to give you 80% of the value of your home which is $280,000 and that means you'll need to find $10,000 as a down payment.
The Cost Of Closing Is Too High
This is another similar example to considering how long you'll reside in your home. Even if you do plan to stay in your house for many more years, you may find that those supposedly amazing terms will cost you more than you can afford.
A number of factors, such as your credit rating, equity levels, etc, all come together to build a picture of the risk you represent to the lender. The results are, more often than not, higher interest rates but, in some cases, you might be hit with high closing costs.
The cost of refinancing a mortgage can be as high as 4% and this sum is rolled over into your loan. Depending on the amount of money you need for refinancing purposes, this fee can add many thousands of dollars to your final bill - a bill you'll need to repay when you close your mortgage down or move it to another lender.
Obviously, you need to do the math and work out the benefits. You may well decide that, in the long or short term, you're prepared to take the plunge and risk losing some money.
Mortgage Refinancing Calculator
As a guide to help you decide whether to consider mortgage re-financing, you can use our mortgage refinance calculator.
Written by James Redden
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Last update: 15 July 2013
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