Wise Bread Picks
One of the few pleasant developments from the recent market turmoil is sustained low mortgage rates. With rates at historic lows, many homeowners are able to refinance their mortgages, shaving hundreds off their monthly expenses. But refinancing isn't always a good choice even if it lowers your monthly payment, because there can be hidden traps. Here are a few such dangers to consider before you decide to refinance. (See also: 6 Great Reasons for Paying Off the Mortgage on Your Home)
Refinancing can stretch out your loan terms.
When you refinance, you are essentially getting a completely new loan. If you are 3 years into your 30-year fixed rate loan, for example, you have 27 years of payments left. Even if you refinance to a new 30-year loan, you've essentially stretched out your payments for another 3 years. In some situations, stretching your loan further into the future may be exactly what you are looking for, but just make sure you indeed want to increase the length of your loan before committing to the new terms, as opposed to merely wanting to recast your mortgage.
There are fees when you refinance.
This may not show up in your documents, but every borrower pays a fee to obtain a new loan. Don't listen to any of the mortgage myths that are out there that claim otherwise. After all, the money used to pay the loan officer has to come from somewhere. Sometimes the fees are wrapped into the entire loan, so you end up with a bigger loan amount. Other times, you are paying for it using a higher loan rate. Whatever the case, there is a cost with the new mortgage. When you work out the specifics of whether refinancing your home loan makes sense, make sure you are considering all fees involved.
It's easy to take money out when you refinance.
Perhaps the most dangerous trap of all is the fact that you can easily take out built-up equity every time you refinance. Homeowners need to recognize that money borrowed is money that needs to be paid back eventually. And as we saw in the financial crisis, falling home prices can put a huge stress on homeowners who are maxed out on their mortgages. Even if house prices go up forever, if you serially refinance, there comes a point in time when you have to sell your home to pay off your mortgage just to keep up with the monthly mortgage payments.
The surest way to lose your house is to continually refinance with a higher loan amount than what you currently owe. The true meaning of home ownership is to reduce your mortgage debt until you own it free and clear. If you don't want to keep your home, then keep taking money out by refinancing.
Refinancing your mortgage could be the closest thing to getting free money, especially when the current rate is lower than the rate on your loan. But think carefully before you hastily apply for another loan application, or else your home could be in jeopardy.
