Buyer Beware: Know the Terms Before You Refinance
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by: marciafreeman
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Refinancing your mortgage makes sound financial sense when interest rates drop. You must, however, completely familiarize yourself with the terms of your new loan before signing on the dotted line so that you know precisely what you are committing yourself to. Knowledge is your best protection from mistakes you will regret later. The housing crisis of the late 2000s is the perfect illustration of the consequences of leaping before you look.
Homeowners refinance their mortgages for a number of reasons. One of the most popular reasons is to lock onto a more favorable interest rate when a current (adjustable rate) mortgage is about to reset. Another popular reason to refinance a mortgage is to gain access to the equity in the home for home improvement or debt reduction purposes by taking out a loan in an amount greater than the outstanding balance of the current one. The benefits of this strategy come at income tax time as mortgage interest is deductible, whereas consumer loan interest is not.
Some homeowners refinance a mortgage in order to shorten the repayment period. Monthly payments will rise, but the overall interest paid over the life of the loan will be less and the loan will be paid off sooner. Regardless of the motivation behind your decision to refinance your mortgage, you should do some preliminary investigation into available mortgage products so that you understand exactly what you will be responsible for.
Another point to consider when deciding whether to refinance your mortgage is how long you intend to remain in your current home. It typically takes about two years before you completely recoup your closing costs from the savings. Refinancing your mortgage only to turn around and sell the home shortly thereafter does not make good financial sense.
Even though refinance of a mortgage does not involve a sale of the home involved, the loan process itself remains the same. You must still pay loan closing costs such as application fees, title update and review charges, title insurance premiums, document processing fees, discount points, appraisal fees, attorney fees and county clerk filing and recording fees. These costs can either be paid upfront or added to the mortgage.
The refinance of your mortgage can be one of your smartest financial moves, provided you understand the terms of the loan and you intend to remain in your home long enough to recover your closing costs.
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