As soon as interest rates begin to drop, people inevitably begin to consider refinancing their home mortgage. It appears, at least on the surface, to be an easy decision; why would you not want to save money through a mortgage with a lower interest rate? However, though many people do see a direct benefit as a result of their refinancing, a refinance does not always make sense for everyone. Before you decide to refinance, make sure to weigh the potential benefits against the drawbacks.

Refinance Mortgage Loan Costs

When you refinance a home loan the lender is not agreeing to the loan out of the kindness of their heart; they are in the business of making money, and if you do not come to the table prepared to deal with hidden fees and costs, you will end up paying more money than you have to.

Here is a list of many, but not all, fees the lender may require you to pay when you refinance:

• Loan Discount Points.
• Loan Origination.
• Processing.
• Administration.
• Application.
• Inspection.
• Document Preparation.
• Appraisal
• Credit Report
• Title Policy
• Escrow Fee.
• Reconvayence.
• Beneficiary Demand.
• Notary.
• Loan Tie-in.
• Delivery and Courier.
• E-Mail Doc.
• Tax Service.
• Recording,

Though all of these fees can be negotiated by the lender, many people remain ignorant of their existence until after they have signed the paperwork, or received their new loan. The trick is that many of these fees are simply rolled into the principal of the loan which helps “hide” them from the borrower until it is to late. Make sure you get a Good Faith estimate, as recent (January 1, 2010) changes to the law force lenders to guarantee what they have promised in an official good faith estimate, and to notify the borrower of any change to that initial estimate.

• Longer Amortization Periods

If you refinance a loan in which you have only 21 years remaining for a new 30 year loan you are effectively turning your loan into a 39 year loan, and so on.

• Larger Mortgage

Many people roll the fees that they incur during the refinance period into the principal of their new loan, increasing the size of their mortgage. Not only does this damage your equity position, some people also make the mistake of taking cash “out” during the refinance process. I call this a mistake because you are effectively paying that cash back for a 30 year period. Unless you have no other option, we strongly recommend against taking cash out.

Mortgage Refinance Benefits.

Now that we have depressed and frightened you with all of the negative effects and potential cots of refinancing, lets focus for a moment on the positives.

• Lower Monthly Payments.

Even though you run the risk of increasing the length and overall size of your mortgage, the increase in cash flow due to a refinance can not be overlooked. If the market, or your credit score, have changed significantly since you forced financed your loan, then you may be in store for a sizable decrease in your monthly payments.

• Shorter Amortization Period.

If you can afford a higher monthly payment then you are currently financed for, a refinance can lower the overall life of your loan. This will increase your long-term financial stability.

• Cash Out

One instance in which it make sense to refinance for the sake of cash-in-hand is if you have an investment opportunity that is going to generate a significant amount of equity.

A potential foreclosure is one of the most frightening things that many people will deal with in their life. The prospect of losing one of the most important assets in your life often causes people to react with fear and anger. Those emotions, while natural, do not help anyone. It is important to stay calm and begin several crucial steps in order to increase the chance of keeping your home.

Contact Your Lender

While this is often the last thing on your mind, it is important to contact your lender as soon as you realize that you are going to have a problem. Do not be embarrassed or ashamed; everyone goes through financial troubles at one time or another. Many of the rights you have as a borrower hinge on communication with your lender. In order to exercise you rights to the fullest it is important that you open a honest line of communication with your mortgage company.

Know Your Rights

Step one of this process is finding all of your loan documentation and identifying what consequences are outlined by your lender in the official agreement.

The second step is to contact a state agency and identify the foreclosure laws of your individual state. While many laws are common on a national level, each individual state has specific laws regarding the foreclosure process. This HUD page contains great links to official state resources.

Prioritize Expenses

Identify which monthly expenses you have that can be reduced or eliminated, and which expenses can be put off until you are in a more financially stable position. After healthcare, your mortgage payment should be your number one priority. Credit cards and other forms of unsecured debt can be ignored until you have stabilized your mortgage situation.

Avoid Foreclosure Prevention Companies.

Though it is tempting to seek help from a “professional” organization, avoid spending money on services that can be better spent on paying your mortgage. The government has a great list of approved counseling agencies that will offer you advice and assistance free of charge.

Don’t Despair.

Fear and frustration are the norm, but that does not mean you have to give in to these emotions. You have options and rights granted by the federal government. Given the state of the economy, banks do not want to foreclose on your home. It is in their best interest to simply work something out with you instead of taking on additional expenses and property management responsibilities.

Mortgage Prequalification

Beginning the mortgage prequalification process is the first step that every potential home buyer should take. By starting the process as soon as you decide that you are going to begin actively looking for a home you not only simplify the process for yourself, but you gain a competitive edge over other potential homeowners who are not prequalified.

How it Relates to You.

The primary way that mortgage prequalification helps you, the home buyer, is that it answers the question “how much house can I afford?” There are just to many factors involved in the answer to this question (credit history, employment history, debt, mortgage programs) that a short or easy answer is impossible. The only way you are going to get a clear answer is through prequalification. Their is no worse feeling in the world than finding your dream home and then finding out that it is out of your price range, or that you might not qualify for a mortgage at all.

How it Relates to your Real Estate Agent

Potential home buyers provide their real estate agent with dozens of specific details about the type of home that they want, while often overlooking the most crucial detail: what they can afford. Window shopping for a home is fun at first, but after a while you and your agent are going to want to narrow your search parameters down to houses you can not only see yourself living in, but that you can make a legitimate offer on.

How it Relates to the seller.

Home sellers are looking to sell their home for as close to their asking price as they, as quickly as they can. When you make an offer on a house, the seller is going to consider both the offer price, and the speed that they think they can close. If you still need to go through the entire mortgage prequalification process not only does that increase the time that it will take for you to close, but you suddenly become a liability. If they accept your offer and you do not qualify for the agreed upon amount then they have effectively lose out on any potential offers they would have received while they waited for you. Basically, very few sellers will be willing to take a chance on a buyer who is not gone through the mortgage prequalification process.

In closing.

Hopefully the previously listed information will help you on your journey to home ownership. Much like life in general, buying a home is all about information and timing. By starting the mortgage prequalification process as soon as you start looking for a house, you provide yourself with free, vital information, and position yourself to act with speed and certainty if your ideal home becomes available.