If you were to strike up a conversation about, now being the time to refinance your home or wait for interest rates drop more, I gather there would be an answer more than a simple “yes or no.” Those that are knowledgeable of how the market works could show ample support for their answer. However, even if the housing market shows all of the signs that now would be a good time to refinance, it would be wise to make sure you know what you are getting. Today’s conversation will take a look at the risks involved in home refinance loans as well as when it’s not a good time to refinance.
Mistakes to Avoid With Home Refinance Loans
One of the reasons homeowners look to acquire home refinance loans is to be able to reduce their monthly mortgage payments. In order to accomplish this, borrowers will obtain a new loan that has lower interest rates. When this happens, homeowners would think their goal has been reached and the savings that will be recouped can be used for other financial matters. What borrowers may not realize that there are risks to refinancing and if a mistake is made during the process, the new mortgage will be more harmful than beneficial. One common problem deals with the extension of the loan term. When a mortgagee seeks to refinance their mortgage, it is common to increase the time before the loan has to be paid off. For example, a borrower decides to extend their new loan to thirty years though only having ten to twenty years left to pay off the original loan. While it may sound great to buy more time before the new loan must be paid back, the issue now is an increase in interest payments that will have to be paid throughout the lifetime of the mortgage. Before committing to a new mortgage, work the numbers using a refinancing calculator to make sure it is worth it to obtain a new mortgage.
Another issue is the fees that must be paid by the borrower before the loan can be approved. These fees known as closing costs go to the new lender as a compensation for making the new mortgage available. Other fees that might have to be taken care of would be appraisals, legal documents, credit checks and more. Even if the lender says that there would be no closing costs applied to the loan, the borrower will ultimately have to pay them and would usually come in the form of an increased interest rate. Even if an applicant is careful to avoid these and other mistakes, there is one “benefit” to refinancing that if not realized and abused, could lead to financial disaster.
Red Flags in a Refinance Loan
While the mistakes mentioned above could lead to financial issues, there is one flaw in judgment that could have disastrous consequences if not realized in time. This “benefit” is the fact that a borrower would have little difficulty to use the equity of their home into cash whenever the time for refinancing calls for it. Many would disagree and say that it would be great to have an extra source of income when in financial need. However, what many mortgagees forget or do not realize that the cash borrowed must be paid back at some point in time. If one would need an example of this, we would not have to look back far in American history to remember what happened during the recent financial crisis in 2008. The dropping of home prices ended up putting a huge strain on those that had their mortgages maxed out and suffered because of it. Even if the prices of homes would increase permanently, a point in time would occur that their home would have to be sold in order to finally pay off their mortgage in order to be able to keep consistent with the monthly mortgage payments. With serial refinancing, it is the surest way to lose a home rather than to keep it. Refinancing a home loan may be considered today as being the closest thing to having free money where the rate at present is less than the rate on your mortgage. Despite this, a mortgagee should think and trend carefully when applying for a new mortgage to avoid losing your home and running into financial disaster.
At some point in life, a person will come across the phrase “handle with care.” Whether it pertains to an object that is extremely fragile or is a safety warning when dealing with certain types of machinery the point is clear; it would be wise to exercise caution before doing anything else. I feel that this statement fits perfectly when a borrower gets involved with refinancing their home loan. When done correctly, it becomes a huge benefit to an applicant in need. Unfortunately, even making one mistake can cause the borrower anywhere from a minor financial problem to a devastating one. That is why applicants should not rush into acquiring a new loan until they are sure of what they are getting into. Calculate and realize what is involved in the process as well as if the new mortgage will really be beneficial or create more of a problem. Also, remember that when using the equity from your home to get access to money, it must be paid back at some point in time. Do not think that when getting a new loan it is equivalent to getting free money. Excessive refinancing will only lead to a financial meltdown as well as losing something that is very important to you; your home.