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5 Pitfalls of Home Refinancing

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    • I’m blown away by the sheer stupidity of this article…

      1) The financially responsible thing to do is to refinance and SAVE THE DIFFERENCE. The scenario about being 5 years into a 30y fixed mortgage and ending up with less equity 15 years later *ONLY* applies if you blow the extra $250/month that you saved by refinancing on other things. Put that in a bank account, a mutual fund, or just pay down your loan faster and suddenly you’ll have FAR more equity / investments than if you kept paying your 5.5% rate.

      2) Refinancing was a simple and easy task for us to do, and we even went from a major bank (WF) to a local credit union. Total out-of-pocket costs were ~$700.

      3) Not everyone needs an appraisal. If your loan was held by F&F you might not need one. We didn’t, and it saved us money and the possibility that we would have come in under the 20% equity.

      4) There’s a “truth in lending” document that every loan officer has to give out. Ours was almost spot on, with the only change being the amount of daily interest we had to pay.

      We dropped from 5% down to 3.875 and are saving ~$275 from where we originally had our loan (originated in ’07 at 6.125). Sure, we tacked on another 5 years, but we’ll have it paid off before we retire *and* we’re investing that extra $275/month in a Roth IRA.

      This article is just dumb.

    • Another option where a homeowner can really save, is if they reduce their term, from say a 30- to a 15-year mortgage. Depending on the rates of the original loan and the refi, moving to a shorter term can save HUGE amounts of money. This may not change the monthly payment much, but if reducing your monthly expense is not a significant driver in your refi decision, opting for shorter terms is a great idea.

    • What Indy said.

      I find it odd that this article didn’t mention the idea of refinancing a 30 yr to a 15 yr. With the rates history over the last decade, people with good credit that bought their house in the last decade are likely in a position where they can refinance their current 30 year mortgage (with 20+ years left)into a 15 year mortgage and end up paying the same monthly payment.

      Pretty much what we did a year or so back. Refi’ed a 30 year to a 15 year for the same monthly payment, but now our house will be paid off entirely by the time our children enter college.


    • This is an article for those with no sense. There are plenty of no-cost, no-fee options available to most with decent credit that the whole premise of cost and fee recovery should be moot. Also, people should have learned the lesson of the housing boom to not use their home as a credit card so, when you refinance, only refinance the balance, not the original loan amount. Not complicated.

    • agreed, most of the financial ‘analysis’ in this article is rudimentary and myopic. which perhaps is why this person writes rather than consults. and that is not a knock, because the goal is to provide some useful information and create some thought and conversation.

      T – saving the difference is a GREAT idea, but only if your return is higher than your net interest expense on the mortgage OR other debt obligations. then it is wiser to put the $275 toward those items.

      Dan and Indiana – also excellent points on the 30 to 15 topic. however, I NEVER recommend it to my clients for one simple reason – flexibility. Virtually all mortgages written in the US are SIMPLE interest instruments – i.e. you can have a 30 yr term, figure out what the 15 yr payment would be, and if you pay it every month you end up at zero balance. BUT even 15yrs is a long time, so say the economy turns south and someone gets laid off during that time (as is currently being experienced by 10% of the population), it is really helpful to have a 30 yr pmt vs a higher 15yr pmt. could you potentially work something out with the bank if you are in those shoes, maybe, but now your fate is in the bank’s hands, not yours…

      Victor – great point, but it depends on what the cash out is used for. if it RETIRES debt (particularly at higher interest rates) that is not re-established, then it is a winner, and a bonus on the tax front. but I agree, many dont have that level of discipline and the old addage comes into play – never make ST debt LT debt if your a consumer.

    • Yogi, don’t you think the interest rate matters? We just refinanced last fall, cutting our rate by 2 percentage points, and going from 30 to a 15-year term. We pay virtually the same monthly payment we had previously, but with the shortened term, we’ll pay a lot less (like hundreds of thousands less) in mortgage interest over the full term. I think we would’ve had to pay an additional several hundred dollars per month to do what you’re suggesting.

    • Just try to refinance! The more you make the harder it is. It’s not just about affording the payments. It’s a complete rectal oral financial exam. If you have some assets and rental properties the process is excruciating. After a 6 months prolonged disaster I’ve given up hope of getting a refinance.

    • The author is making a mistake to compare the two $200,000 mortgages, saying 4% has $55,000 equity at 15y V/S 5.5% has $61,000 equity without refinancing. You have to compare the payment difference. Payments on the original apx. 1135.58 After the refinance (including $5K closing) would be apx $978.70. $156 mo.= $28,238 SAVINGS in 15 YRS. The numbers are not exact, but the savings to refinance would be far more than the $6K increased equity at 15 years.

    • I just refinanced and it was about the easiest thing I have ever done. All of it was done online and via email. The closing was in our dining room. If you have your sh@t together and are not a financial disaster, it is easy. We save over $250 a month and our fees will be recouped in 18 months and we will have caught up equity-wise, too.

    • This article is complete blasphemy. I hope the rest of the web site is not like this. Completely agree with comments from “T”. If you pay down the extra money you save with the lower rate, your principal will be way down.

    • What prevents smartmoney.com from posting an article in its entirety on one page? If the idea is to have readers see multiple ads by having them click on “Next” to go through the article, just put all the ads on one page at strategic points along the lenght of the article. I hate having to click “Next” to go thru the entire article, I want to be able to read it in one view continuing to click on something. Make it simple!

    • Last sentence should have read “not having to continue to click on a button to read the article”. Proof read before posting. Sigh.

    • In California, the original home mortgage liability is “non-recourse,” meaning that if the borrower defaults, the lender cannot go after the borrower’s other assets. A refinance mortgage does not provide this protection to the borrower.

      Also, if the refinanced amount is greater than the balance of the old loan, and the difference is not used to finance improvements or additions to the personal residence, the interest paid on that additional financing is not considered “housing” interest and therefore may be subject to the Alternative Minimum Tax.

    • Thanks, CuriousDave. Now these are the real pitfalls I was not aware of. You should’ve written the original article :)

    • I’m a Mortgage Banker for a Community Bank able to do loans in all 50 States. Yes, the process takes longer since so many people are refinancing and requires tons of documentatation but if you’re working with the right person you will get the best options made available to you. There is 25 Year and a 20 Year fixed for those who don’t want to start over or can’t afford a 15 Year Fixed. More importantly, how long do you plan to keep your place. If it is less than 7 Years, it makes no sense to get a 30 Year and pay a 1% higher interest rate. Please call me for a free consultation (646) 260-3855.

    • The biggest omission from this story is that lenders such as myself often can and do pay all closing costs for borrowers. I am using the new FHA streamline program to reduce rates for borrowers with FHA loans originated by April 2009, and their loan size is the same as their payoff. Writing most of these loans at 4.0%, helping a LOT of clients throughout the country without it costing any of them a dime, and with nothing getting rolled into their loan. Glad to provide more details, give me a call at 314-740-0004.

    • It’s pretty clear that they are trying to maximize page views: that’s why a two bullet point article requires 6 clicks – so they can add value to their advertisers. The whole list thing is old – why is it “the five things” instead of just “read the documents carefully and don’t be stupid?”

      Crap content — taking over the web, and linked to freely (or is it at a cost?) from the WSJ.

    • refinancing does NOT mean starting from scratch… get a shorter term loan, or one that closely matches the maturity of the original note.

    • What irks me about refinancing is the amount of money and number of entities that benefit from a transaction that should be very simple. If you have good credit, have a history of timely making mortgage payments and the property value clearly exceeds the value of the loan, why should it be necessary to charge a borrower closing costs as if they’ve never had a mortgage before? Yes, a fair fee should be charged for the costs involved as well as reasonable profit, but (as with the entire mortgage fiasco which got us into a recession), there are just too many entities making way too much money (especially in the age of automation) to afford the average consumer a true benefit from the lower interest rates, ostensibly designed to spur the economy, without waiting 7 years for the privilege. Although some lenders “streamline” the refi process and charge a little less to existing customers, borrowers should not be penalized with the exorbitant processing fees typically charged by lenders and those who provide services to them, other than the relatively small portion of fees necessary to comply with governmental regulations designed to protect both lender and borrower.

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    • Once again lazy journalism.
      1. Refinancing lowers your monthly required payment what you do with the extra money is a personal decision. I refinanced and took the extra money to pay down student loans. Others continue paying the same amount and pay down their principle faster. Again refiancing is not the problem its a consumer choice.

      2. Shop for refinancing. I used a broker who came highly recommended. Brokers are required to show their commission. He showed his commission and then was willing to pay my closing costs. He has a target commission in dollars and then puts the rest back to the borrower. Just like evrything else do your homework.

      3. When I did the final signing of documents, it clearly stated when to stop paying my existing mortgage and when my first payment was due for the new mortgage. Not sure what the problem was.

      4. Appraisal is a problem. Obviously homeowners have little control over this. I refinanced after being in my home about two years. I had to put more money down to maintain 20%. Luckily my house value had not decreased enough that it was impractical to make a big equity payment.

    • I refinanced under HARP. I had an existing 30 year loan for which I refinanced at 4% for a new 30 year term. I realize that I will have the mortgage well into retirement, but I am saving $500 a month in expenses. My mortgage is cheaper than renting. The value of my condo is about the same when I bought it 7 years ago. Later I can decide to pay the mortgage off or sell my condo.

    • You don’t automatically have to refinance into a 30-year loan… I refinanced into a 20-year loan after owning a condo for 5 years, so my rate went down as well as the term of my loan. I had a high interest rate of 7.25% initially, so my payments were still lower in the 20-year loan.

    • How does a 1% lower rate on a $300,000 loan translate to a monthly savings of only $178? Wouldn’t it be more like $250?
      This article is not well researched.

    • “How does a 1% lower rate on a $300,000 loan translate to a monthly savings of only $178? Wouldn’t it be more like $250?
      This article is not well researched.”

      P&I payment on 30-year, $300,000 mortgage at 5%: $1,610.46. At 4%: $1,432.25. Difference: $178.22.

      Some of the other criticisms of this article seem valid to me. But, the implication that the author’s math is off-base is not correct.

    • One pitfall that the author did not mention was that you MAY need to readjust your Federal/State income tax with holdings to hold more after you refinance. Since you will pay less interest, you will have less mortgage interest to deduct from your income taxes when you file next year.

      You don’t want to get socked at the end of the year and owe a huge sum of additional income taxes because you now pay less interest.

    • actually, one would most likely save more than the $178 per month because they will have paid down some of the principal. You don’t have a 300,000 mortgage for 5 yrs and then refinance another 300,000 unless you want to take money out (good luck finding one of those these days!). After paying on a loan for half that amount for around 5-6 yrs it cut my monthly payments by $300 when the rate dropped by one point. Best thing to do is sit down with an honest broker and see what they can do for your individual situation.

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