Common Mistakes When It Comes To Refinancing

Common Mistakes When It Comes to​ Refinancing
There are many reasons for refinancing your mortgage .​
Refinancing can reduce your interest rates,​ your monthly payment,​ or​ both .​
Often,​ refinancing is​ an​ effective way to​ consolidate debt and to​ reach your long term financial goals.
However,​ there are many common mistakes when it​ comes to​ refinancing,​ some of​ them so serious they could cause you​ to​ lose your home .​
Identifying pitfalls is​ the​ best way to​ make a​ refinancing decision you​ will not later regret.
When refinancing,​ you​ do not want to​ eliminate all the​ equity you​ have worked so hard to​ build .​
Home ownership is​ all about building equity – it​ is​ the​ equity in​ your home that makes it​ one of,​ if​ not the​ most valuable investment you​ will ever make.
This does not mean refinancing your home is​ always a​ bad financial decision – in​ fact,​ often refinancing can be a​ big step toward reaching your long-term financial goals .​
And it​ is​ the​ equity in​ your home that allows you​ to​ refinance in​ the​ first place .​
What you​ want is​ a​ loan that allows you​ to​ borrow against some – but not all – of​ your equity.
The most common mistake homeowners make with regards to​ canceling equity is​ cash-out refinancing .​
On the​ surface,​ cash-out options can appear extremely attractive,​ because they allow you​ to​ take cash out of​ your loan amount and put it​ in​ your pocket .​
You can use the​ cash to​ pay off debt,​ but taking cash out reduces the​ equity in​ your home,​ and can even eliminate it​ altogether.
To avoid this refinancing pitfall,​ consider a​ second mortgage as​ an​ alternative to​ refinancing with a​ cash-out option,​ especially if​ the​ interest rate is​ higher on​ the​ new cash-out loan .​
Already have a​ second mortgage? Then refinancing with a​ cash-out loan is​ very likely to​ eliminate all your equity .​
Instead,​ you​ can refinance both mortgages into one new mortgage with a​ cash-out option.
Another form of​ refinancing homeowners might regret is​ refinancing from a​ fixed rate mortgage (FRM) to​ an​ adjustable rate mortgage (ARM) .​
Homeowners often do this to​ lower their monthly payments,​ but with an​ ARM,​ the​ interest rate is​ not locked in​ .​
Sure,​ the​ payments may be lower now,​ but if​ interest rates go up,​ future payments could be higher than the​ payments you​ were trying to​ reduce.
Refinancing options that homeowners are not likely to​ regret include refinancing from an​ ARM to​ an​ FRM in​ order to​ lock in​ a​ low interest rate .​
This is​ a​ decision that is​ usually made with long-term financial goals in​ mind.
Another refinancing decision that is​ generally sound is​ refinancing to​ the​ same type of​ mortgage with a​ lower interest rate than the​ current loan .​
So long as​ the​ borrower expects to​ remain in​ the​ home long enough for the​ interest savings to​ cover the​ cost of​ refinancing,​ the​ borrower usually will not regret this decision.
Low interest rates and a​ lucrative real estate market have prompted many homeowners to​ consider refinancing .​
But with predatory lending on​ the​ rise,​ it​ is​ up to​ you,​ the​ homeowner,​ to​ protect your investment .​
Fortunately,​ the​ Federal Truth in​ Lending Act is​ a​ safeguard for those who refinance a​ loan on​ their primary residence with a​ different lender .​
This Act guarantees borrowers the​ right of​ rescission,​ meaning they can cancel the​ debt within 3 days of​ closing .​
Not many borrowers take advantage of​ this option,​ but those who do are not stuck with a​ refinancing decision they will come to​ regret.
Common Mistakes When It Comes To Refinancing Common Mistakes When It Comes To Refinancing Reviewed by Henda Yesti on August 21, 2018 Rating: 5

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