Why Not?
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.