While refinancing can be helpful for some,
for others it can be down right expensive, causing a crippling
delay in paying off your mortgage, saving for retirement
or building considerable equity in your home.
Consider these points before you decide to refinance your
mortgage:
>The first two years of your mortgage
payment is mostly interest.
>There are cost, (sometimes excessive
cost), to purchase every new mortgage.
A mortgage with advertised points and fees make it easy to
analyze your overall cost. These loans also qualify for
the lowest advertised current interest rates.
A mortgage with no advertised points or escrow cost make
it difficult to analyze your actual cost, since no one
works for free, the cost are delivered to you another way.
One way the finance company earns a profit with a no point's
loan is by offering you a higher interest rate. Therefore,
you either pay your points and escrow cost up front, or
they are added into your monthly mortgage payments. Either
way, you will pay cost.
>You decide to refinance and get a new 30-year mortgage.
Now you have just started paying for your house all over
again, and you have started a new 2 year period of "nearly
interest only" payments, as well as a whole new set
of cost.
>Say you have owned your home 6
years, but refinanced it after 4 years. During the 6 years,
you have actually paid
on your mortgage for 2 years. You have paid twice for loans,
and you started a new 30-year loan after reducing your principle
in the 4 years.
>Then there is the "take out a home loan to buy
a new car or get that dream pool" advice. Do you really
want to pay for a car or a pool over a 15 or 30-year period?
with all of the new loan cost associated? Even with the mortgage
tax deduction, amortizing a small item over that many years
will increase the cost of the car or pool substantially.
Use our amortization calculator to determine your cost using
various "years to pay" scenarios.
>When is refinancing beneficial?
Probably if you obtained your loan when interest rates
were high, at least 3-4 percentage
points higher than the current rate, and refinancing will
bring down the monthly payment $400 to $500 dollars. However,
if you already paid on your 30-year mortgage for 10 years,
you only have 20 years left and it will be paid off. Don't
you want to pay off your house and retire as soon as possible?
This is what most people say they are planning. Use our Mortgage
Tutorial to educate yourself about home buying and mortgages.
>There is also the home equity
loan with the hidden balloon payment. You make monthly
payments on a loan against your
home, and then there is a huge payment at the end of 2 years,
4 years or more.The balloon payment is not always made clear
to the homeowner. Some homeowners are forced to forfeit the
home due to lack of funds for the balloon payment. This topic
is beyond the scope of this article. But, this is another
factor to be aware of.
>For Americans, owning your own
home is still one of the best investments there is, provided
you allow the equity
to grow untouched.
Lois Center-Shabazz is the founder of MsFinancialSavvy.com
and author of the 3-time award-winning personal
finance book, Let's Get Financial Savvy! ISBN
#0971979502.
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