If you have come to a point in your finances where you are considering refinancing your home, there are some important factors to consider.
- Do you want to consolidate debt into one monthly payment?
- Do you want to take advantage of lower interest rates and refinance your current mortgage?
- Are you in a financial situation where refinancing your home and taking out enough money from the equity could help you pay off your debt and lower your monthly payments?
Another major factor, is choosing the right lending institution. Your choice can significantly impact the interest rate, terms, and safety of your refinancing. Finally, you will need to consider what the new borrowed amount will mean to your overall financial picture. Here are some additional points to consider when you are thinking about refinancing.
Check Out The Lender
Make sure the lender you are working with has your best interests at heart. There are second mortgage companies that make their money refinancing for borrowers who are in tight and serious financial situations. If you do not have good credit, they may seem like a savior because they are “willing to give you a chance” when no one else will, or so it seems. But at what cost?
Remember, some second mortgage companies make their money by charging you much higher interest rates and fees. They sometimes justify their costs by telling you that if you are on time and current with your payments for a year, the company will lower the rates by refinancing your loan again. What you have to wonder is whether or not they will be there in a year and will they actually refinance your loan again? You would also have to pay their high fees again. It is also not uncommon for less than reputable companies to frequently move and change their name.
The variable rate and balloon rate options are other possible problems. Your rate may start out low but rocket higher over the course of your loan ‒ or the final balloon payment is not realistic based on your income. Fixed rate refinancing is generally a better choice.
Another area to look at is fees, such as loan origination fees, points and other charges. If your credit is less than perfect, the justification for higher fees and rates is usually your credit record. Regardless, a fee that is 5% higher than the standard loan fees is too high. You should check what the fees in your area are before you commit to a second mortgage or refinancing.
Don’t Be Caught By Payment Sales Hooks
Some lenders increase their fees, your rates, and their returns by convincing you to borrow or refinance more than you need. The sales hook is that you can pay off all of your loans or debts and have only one monthly payment. But how much is that payment? Can you afford it? If you can’t afford it, you could lose your house. Although it may sound like a great idea, you have to ask yourself if it is too good to be true.
Get An Accurate Home Appraisal
You might be surprised when a lender tells you the appraisal on your home is much higher than you thought it would be. In order for the lender to provide you with the amount of money you will need to pay their fees and charges, and to consolidate all your debt, your available equity must cover the loan. A lender who wants to make sure they get the loan often fixes the appraised value by hiring their own appraiser. Amazingly, the appraiser usually finds there is just enough equity to cover the refinancing.
A potential borrower from Pennsylvania went through the lender’s appraisal process and was astonished to find out his house was worth $60,000 more than he thought. When a second appraiser from another company came in, the potential borrower was even more shocked to find out the house wasn’t marketable at the first lender’s appraisal price. The independent appraiser set the market value at $70,000 below what the first lender’s appraiser reported.
Luckily, the potential borrower stopped the negotiations. Had the refinancing gone through, the borrower would have had a mortgage payment almost double what he had before with an interest payment 5% higher, and a new mortgage that was double his original mortgage.
Always look at all of your options. Consider tightening your belt, re-evaluating your budget, and other cost-cutting methods. If you think taking out a second mortgage, refinancing, or consolidating debt might be the answer, talk to your credit union first. A credit union will help you make the best financial choices for your situation.