If a mortgage refinance is done the right way, it can be very advantageous for a homeowner. However, doing it the wrong way will cost you money, time, and energy. Here are some reasons that a mortgage refinance may not be a good decision.
Unable to get a better interest rate.
If the rate you currently have on your home loan is not much higher than the interest rates you would be able to qualify for, a refinance may not be good. Typically, if a homeowner can save 2% or more in interest rates, they will assistance from a home refinance. If the rate is less than 2% better than yours, you may need to see what the benefits will be, as the amount of money being saved may be conquer with the expenses of closing a refinancing. Refinancing and not getting a better mortgage rate can cause problems in the long run, and cost you more money than you would have to use in your current home loan.
Refinancing from a Fixed Rate Mortgage into an ARM.
Many homeowners are drawn to ARM (modificated rate mortgages) because they are cheaper, and easier to get into. However, they are not usually the best long term solutions for a homeowner. It is usually not a good idea to leave the stability and security of a fixed rate mortgage and get into an ARM. While ARM loans may have small initial interest rates, that phase will expire. When it does, it can quickly increase in interest rates, and your monthly payments. Many homeowners think that it is a good answer because they will be able to make the higher payments in the future. However, many people thought that, and are now facing foreclosure or other financial problems.
Penalties and Closing Costs
There may be a prepayment penalty associated with your mortgage. This fee is enacted when a mortgage is paid off early. Many homeowners will have to pay some kind of fees, including a prepayment penalty when they get a mortgage refinance. This penalty, in addition to the thousands of dollars in lender costs and loan closing fees, can make a refinance a bad decision for some. Know what your break in period is, and that will tell you when to truly expect to start seeing savings.
Planning What to Do with the Savings
Take some time to carefully consider what you will do after a refinance to enhance your finances in the future. If you are using the money from a refinancing to enhance your home or finances, than it is a good decision. However, it is not wise to just use the money, and not think about the long term. Using equity in a bad way can really strain your financial future.