Slippery Slope: Low Interest Rates are encouraging homeowners to refinance their mortgages
November 15, 2012
Author: Allison K.Watkins
There are many reasons to refinance your mortgage, such as, cheap interest rates, getting away from equity that may have built on your home or to pay lower monthly payments. These are the reasons most of the Americans are refinancing their mortgages.
As the interest rate is at an all time low, homeowners are willing to refinance their mortgages with low interest rates to cut down the higher payments. Homeowners are looking at the current market as a win-win situation, but there are certain things that homeowners must keep in mind before refinancing their mortgages. What if the rate suddenly increased or your lender is not reading you the fine print?
You must have heard some lenders offering you a no-cost loan or low-cost loan, forget it. That is a ruse. You have to pay cost for processing your loan and on an average; it ranges from $1,900 to $3,650. According to the Federal Reserve, this fee does not include any loan origination fee that could be 0 to 1.5 percent of the principal loan. This is an upfront fee that you have to pay.
For example, if you have a mortgage of $175,000, the closing fees that you have to pay would be something around $3,500. Beside this fee, there could be some other fees that your lender will ask you for your loan processing. So, how much are you really saving?
Most homeowners do not know that the original mortgage loan is a non-recourse debt and after refinancing, it turns to a recourse debt. The question is what if you failed to pay out your mortgage after refinancing? What will be the lenders action? If you failed to pay out your original mortgage or non-recourse debt, your bank will foreclose your home whether it meets or does not meet the amount that you have not paid. Whereas, if your debt became recourse, your bank will sell out your other assets to recover the total amount that you have not paid. So you’ll have to be very careful about this one.
In most of the cases, there is pre-payment penalty with your original loan. So it is an additional charge or fee that you have to pay when refinancing. This will amplify the time period of recovery of refinancing cost.
Analyze Time to recover costing fees:
You should calculate the time that it will take to recover your closing fee and pre-payment penalty (if you have it with your original mortgage). A homeowner who is looking to sell out his home within 4-5 years should not refinance. He will not get a single cent in return because the refinance fees will take more than 4-5 years to recover.
Homeowners should not hurry to refinance their mortgage just because of the low rates these days. They must educate themselves with the pros and cons of refinancing. In many cases, it is seen that people who have refinanced their mortgages due to low interest rate have paid more money comparatively.
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