Monday, April 6, 2015

How to Recognize a Bad Mortgage Refinance Loan

As mortgage rates drop, you might anticipate refinancing your mortgage and getting a lower rate and payment. Your current home loan lender may encourage refinancing, and you might receive unsolicited offers from other banks in the area.

With so many financial institutions offering refinancing, and given how it’s a common mortgage practice, it’s easy to assume that any loan is a good one. Fortunately, not all re-financing offers are favorable, and if you’re not careful, you might refinance into a loan with undesirable terms. Here’s a look at three signs of a bad mortgage refinance.

  1. Going from a fixed-rate to an adjustable-rate  

If you tell a mortgage lender you want the lowest interest rate and monthly payment possible, the lender might suggest refinancing into an adjustable-rate mortgage.

These mortgages typically offer lower rates than fixed-rate mortgages during the initial years, which can dramatically reduce your home loan payment. This is a godsend if you’re experiencing payment problems. The problem, however, is that these low rates aren’t permanent. Sure, you might have an attractive fixed rate for the next two or three years, but your rate will adjust every year thereafter. And with each rate adjustment, the interest rate can increase or decrease. If the rate increases, so does your home loan payment.

  1. Lender encourages borrowing too much

When refinancing a mortgage loan, there’s the option of cashing out your equity. You can use the money for debt consolidation, home improvements or build your rainy day fund.

There’s nothing wrong with a cash-out refinance. If you have plenty of equity, it’s an affordable way to put quick cash in your pocket. The problem is that some people cash out too much of their equity.

A cash-out refinance increases how much you owe, so instead of dropping your mortgage payment, it might increase. And unfortunately, some lenders encourage borrowers to cash out as much of their equity as possible. A loan officer might excite a borrower by explaining the many uses for cash, and unfortunately, some people can’t see past dollar signs. As a rule of thumb, only consider a cash-out refinance if you can comfortably afford a higher monthly payment, or else you’ll risk losing the home.

  1. Overly expensive closing costs

Closing costs vary, and you can expect to pay between two percent and five percent of the mortgage balance. If you’re refinancing for the first time, you may assume closing costs are the same no matter where you go. However, different banks charge different fees for common services, such as the loan origination, the appraisal, the title search, etc. And some lenders bet on the fact that you’re not going to do your homework and compare costs.

Even if you have a long-term relationship with your current bank and you’re using this financial institution for your refinance, make sure you get at least two or three quotes from other lenders. Since closing costs are paid out-of-pocket or wrapped into the mortgage loan, comparison shopping is the only way to protect against getting ripped off.

Bottom Line

Refinancing a mortgage loan can be the answer if you need a lower house payment. However, if you take a chance with an adjustable rate mortgage, borrow more than you can afford or get stuck with high fees, refinancing might not be as financially beneficial as you think.