5 Pitfalls of Refinancing

by Gary and Lisa Schoeffler on June 12, 2012

in Latest News

1. Refinancing means starting from scratch. When homeowners sign up for a 30-year mortgage, the monthly payments made during the first seven years will pay down about 5% of their principal, with the rest going toward interest, Lattas says. Instead of making a dent in their principal, homeowners who refinance after the seven-year mark effectively start the payment process all over again.

2. Closing costs could outweigh the savings. Homeowners who refinance have to pay closing costs, and those expenses can be larger than the savings, depending on how long the borrower plans to keep the home. Closing costs typically run around 1.5% of the loan amount, says Greg McBride, senior financial analyst for Bankrate.com. Borrowers should compare those expenses to the amount they’ll save each month with a lower interest rate and find the break-even point: how long they’ll need to be in that home before they recoup the expenses.

3. Terms can be confusing. With refinances taking longer to process, experts say there’s more confusion about when borrowers should stop paying their original mortgage. Since the new monthly payment on a refinance will be lower, borrowers typically don’t pay the original mortgage the month their new mortgage is expected to come through. But that strategy works only if the refinance is processed on schedule. If there’s a delay and borrowers don’t make a payment on their original mortgage, they’ll fall behind on their mortgage payments. That could derail the entire process.

4. Hidden fees add up. Under federal law, lenders have to provide borrowers with a good-faith estimate, which details the mortgage amount and fees, to the completion of a refinance. Borrowers should review that paperwork closely and look for red flags, such as if the mortgage amount is larger than the mortgage they currently have, Lattas says. That’s likely a sign that the lender has added the closing costs into the mortgage. While rolling those costs into the loan is permitted, borrowers should decide whether to do that, which would mean paying interest on that amount over the long run, or to pay those costs upfront at closing.

5. The appraisal might be too low. Before approving a refinance, banks require an appraisal of the home to confirm its value. But over the past year, a growing number of appraisals have been finding home values to be lower than what homeowners expected. That’s largely due to foreclosure sales that lower the value of nearby properties. If the appraiser finds the value of a home to be less than the amount for which the borrower wants to refinance or finds that the home doesn’t have enough equity to meet the bank’s requirements, the lender could pull the plug on the refinance, Lattas says.

Before approaching a lender for a refinance, a homeowner should try to get an idea of the value of the home, McBride says. Review nearby listings of similar homes to see what those asking prices are and speak with a real-estate agent who knows how much homes are actually selling for.

If you are thinking about refinancing we would be happy to provide with a current Comparative Market Analysis for your home.  Contact us today!  Looking for a referral to an excellent lender?  We can help.  We are always here to answer all of your real estate questions!

Lisa Schoeffler, CRS, ASP
Prudential California Realty
A member of HomeServices of America, Inc.
a Berkshire Hathaway affiliate

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Post by Gary and Lisa Schoeffler

Gary and Lisa Schoeffler are Ventura Real Estate Professionals specializing in residential real estate. Their expertise in helping both buyers and sellers is widely recognized in Ventura County. How can they assist you today? Wondering what the market is like? Call them, they will be happy to talk with you about it. 805-320-4472

Gary and Lisa has written 371 articles.

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