Refinancing May Not Always Be The Best Idea
More rates and news from
Yahoo Finance and Realty Times
(If you are currently paying a mortgage that has high interest rates or that is about to “reset” from your initial adjustable rate, you should refinance, right?)
Refinancing is typically viewed as a positive thing to do all the time. While, it does prove to be very useful for many people, you do have to consider other options once in a while before automatically refinancing because it may not be beneficial to your particular situation or during a specific time.
The article, “When NOT to refinance” written by Michael D. Larson of Bankrate.com, provides tips as to when refinancing may not be beneficial to you.
“Some homeowners with second mortgages, a lot of debt or trouble paying bills on time might find that they would pay more by refinancing than by sticking with the loan they already have.”
So, before you decide to refinance, you have to determine if, indeed it would be beneficial for someone in your situation.
First you should determine if there is enough equity in your property. “A homeowner who borrowed 90 percent of the house's value three years ago hasn't increased the equity stake very much since then. It doesn't make sense to refinance such a loan, especially if closing costs are rolled in,” said Paul Tobin, market manager for the mortgage sector of Fleet Financial Group Inc.
The second thing that needs to be determined is the borrower’s credit rating and history. Obviously the borrower’s credit was at least good enough to obtain a first mortgage but has anything different happened since that time. Too often, people have it all set in their minds that they are going to refinance their mortgage only to find out that the extra car loan and few missed payments has caused their credit score to drop to a level that would constitute higher interest rates anyways or that would deny approval. When someone applies to refinance a mortgage, they have to go through the same scrutinized underwriting process. “Experts point out that none of this will exclude someone from refinancing entirely. Almost any borrower can find a willing lender. The devil is in the details: Borrowers with smudged credit or other problems -- ‘nonconforming’ is the term used in the trade -- may find the rates they qualify for today are either higher than the rates they already have, or not low enough to make refinancing worthwhile.”
Even borrowers with good credit wishing to refinance have to be aware of a couple of factors that may make refinancing not a viable option. Private mortgage insurance or a longer term of payment would create cause to consider not refinancing.
“Most people who borrow more than 80 percent of a home's value pay private mortgage insurance, which protects the lender in case of default. Let's say the owner of a $150,000 home who wants to combine a $110,000 first mortgage with a $20,000 home equity loan. The combined, refinanced loan would be for more than 80 percent of the home's value, so the borrower would have to pay PMI. Such a borrower would have to consider the PMI payment when deciding whether refinancing would save money.”
Even worse, would be if you had been paying a 30-year mortgage for 15 years and then refinanced. Your monthly payment would be lower but you would also have a mortgage fro an additional 15 years. Your overwhelming 30-year mortgage just turned into 45 years. You would not have agreed to a 45-year mortgage when you first bought the property, regardless of how low your payments became.
You need to do your homework and accurately calculate how much you would save at a particular interest rate if you refinanced. You may discover it is not such a great financial decision after all.
