Okay, so you have been paying mortgage payments for a few years. Now you are getting hundreds if not thousands of calls from various mortgage companies and banks who want you to refinance your home using their home refinance company. So how can you tell if it is to your advantage to refinance your house?
It depends both on what kind of a mortgage you currently hold, and what your current interest rates are. Is your mortgage the kind where initially the payments and interest were quite small, but after a few years gets real, resulting in a big increase in payments?
I had a home loan like that. It was called a Variable Interest Rate. These are sometimes good for new home buyers who cannot qualify for a regular mortgage. My payments started out at something like 3.5 % for 3 years, but then could increase as much as 2 % a year, topping out at about 11 %. In other words, after 3 years I was basically screwed. My payment could actually almost double the fourth year and then by the seventh year could be as much as 3 times my initial payment.
Run from Variable Interest Loans unless you can a home loan refinance the third year before your mortgage goes sky high. The only little problem with doing this is that many loans have in the tiny little print that people might just overlook when signing a mortgage loan a penalty clause for early payment. This includes refinancing your home. So you might just get stuck with a major penalty payment before you can even begin considering the home refinance company's best offer.
My brother-in-law decided to refinance his mortgage because he needed some money to repair his roof. Fortunately his home had gone up considerably in value since he had begun buying it, so he was able to take out a larger mortgage during the refinancing than he had originally. His refinancing included an additional $10,000 or so dollars besides the original mortgage. But he had to agree to steep penalties for five years for early repayment. The refinancing company wanted to make sure he did not go someplace else and get even better rates or even consider refinancing his home again for at least five years. They wanted to lock him in.
If you are going to try this, be sure to get a very low home loan refinance rate for your new mortgage. Otherwise you are just going backwards quickly. Refinancing at a higher rate is a super bad idea. Just don't do it unless you absolutely have to. A tiny increase in the rate can make a difference of $1000's and $1000's of dollars over the life of the loan.
And don't forget that most banks charge what they call "points" to finance or refinance a mortgage. These are percentage points added to the loan. For example, if you have a $300,000 loan and the bank wants 3 points to originate the loan, this is 3% of the $300,000 or $9,000 extra just added to the total loan because the bank wants to make additional money. Some of this $9000 usually goes as a bonus to the clerk or bank officer who "helps" you with the loan. Is it any wonder that there are people calling you six times a day telling you that they will refinance your house and that their initial rates are 2.4%. What they won't tell you until they get you hooked on refinancing is that after the initial period, be it one year, two years, or whatever, the loan goes up--sometimes WAY up. That 2.4% initial rate may sound pretty good, especially if your current rate is 6%. Just remember the points... that can add up to a REAL percentage rate of much more than your current rate of 6%.
You might think, well, I am getting so many offers, I can just refinance AGAIN before I lose that initial 2.4%. But you still have to consider the early payment penalty usually included with this type of loan, and the points the new home loan refinance company will charge you that they hardly every want to tell you about up front. And if your home has actually gone down in value, you can just forget it.
In fact, refinancing can be fraught with so many dangers of hidden charges and increasing interest rates that it would be especially prudent to hire an attorney to read over the loan papers before you sign anything. I don't know how many people got suckered into giving up their current loan which had a very low interest rate and taking out a new mortgage refinance loan because some hot shot agent sold them on the idea of putting money in their pocket right now but completely failed to tell them that the new loan was actually going to cost them twice or three times what they were currently paying.
The last person to help you honestly evaluate whether or not the loan is a good loan for you is the person trying to pressure you to sign on the dotted line so he/she can make a super commission of thousands of dollars. When thousands of dollars are at stake, some salesmen have been know to exaggerate and stretch the truth a bit. What I am telling you is that for several thousand dollars, they sometimes outright lie. And once you have signed the papers, you are legally stuck. Whatever they told you verbally while selling you the loan isn't worth the paper it is written on.... It is absolutely worth nothing in a court of law.
Unless you get a non-biased attorney (who will represent and protect you) who deals with loan papers every day to go over the "fine print" of the loan, you could just be stuck for hundreds of thousands of additional dollars merely to put $10,000 or even $20,000 in your pocket now. Sure that $20,000 in the pocket is tempting. But remember, even at relatively low interest rates, that $20,000 could wind up costing you up to $45,000 or even more over the life of the loan. Is it really worth it? NO!! You can refinance yourself right out of your house. If you cannot make the loan payments, the bank will evict you. I know. It happened to me. Nothing is worth going through that. The bank got my home AND all the thousands of dollars I had paid up until that point. Then they resold the home and somebody else got a chance to try paying for it.
So make sure any time you are considering refinancing your home it is good for you, and not just good for the agent selling you the home refinance loan. If you need to refinance your home, why not go out actively looking for a loan, and not just take phone calls? Those guys making the phone calls are often really looking for suckers.
Happy home buying,
David A. Youngs
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