When Refinancing is NOT a Good Option
It happens every time. Interest rates go way down and homeowners lineup to refinance their homes. If you bought your home with a high interest rate mortgage, refinancing becomes an even more tempting proposition. It is important to remember though, that not everyone benefits from refinancing their mortgage.
If you already have a second mortgage, lots of debt or are having trouble paying your bills on time, you may find that refinancing may actually cost more over the long term.
The Importance of Your Home Equity and Your Credit History
One thing you want to ask if you are considering refinancing, is whether or not you have enough equity in your home for it to make sense. For instance, someone was borrowed 90% of the equity in their home and hasn’t paid down their mortgage balance it all, it probably doesn’t make much sense to refinance once you factor in closing costs.
And remember to keep in mind is your credit history. When dealing with refinancing and home mortgages in general, it is very important that you maintain a good credit history and that means maintaining a good ratio between the amount of debt you have and the amount of income that you have. This ratio has become much more strained for many people over the past five years.
If you’re one of the people that has taken advantage of cheap money and borrowed more against your house than the house is worth, you are also likely to have more trouble finding a mortgage lender who will refinance your existing home loan.
Always remember, that refinancing a home loan is going to bring the same scrutiny to your finances and your credit history as when you initially applied for your first mortgage. If you’ve made one or more late payments or if you’ve been forced to use credit cards in order to maintain your lifestyle, you may be in for some serious challenges when having to refinance.
The Rate Trap
To be completely honest, if you look hard enough you will find a lending institution that is willing to refinance your loan. But, if you have poor credit history or other blemishes on your credit you may fall into what is considered a nonconforming rate. This means that you might actually end up qualifying fora rate which is higher than what you’re already paying. Essentially, it may not be low enough for refinancing to make sense once you factor in closing costs.
Also, if you’ve paid down your first mortgage considerably over the past several years, refinancing may not be a good option for you because it will extend the amount of time it will take to pay off your home. You really need to look at the bottom-line and figure out what the refinancing is actually going to cost you. Compare that with what you currently pay and figure out how long it would take you to get back the costs of refinancing. You just might find that it makes a lot more sense to simply stick with what you have and continue making payments under your current mortgage.
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