Does a Mortgage Refinancing Always Work?
If you’re considering a mortgage refinancing, you might assume that going through this process will save you hundreds and even thousands of dollars over the life of your home loan.
For most people, this can be true and for those who are facing an adjustment to their adjustable rate mortgage, this might be the only way to keep their mortgage affordable and within their budget! But surprisingly enough, a mortgage refinancing doesn’t always work for everyone. Why is this?
There are a few things to consider in this regard. For one thing, there are fees and costs involved with a mortgage refinancing. Your lender has the right to charge prepayment penalties for any mortgage that is paid off early, which is what you’re doing.
Typically these costs are points, or 1% of every $100,000 left on your loan. They may charge 2 or 3 points or even more, depending on the terms of your current mortgage. They also charge the same fees that were charged at the first closing of your mortgage, including appraisal fees, broker fees, and so on.
This means that sometimes it takes months and even years for what a person saves with a mortgage refinancing to offset those costs. In cases like these, it’s often better to put off the mortgage refinancing process until your principal balance is paid down even more so that those points cost less.
Typically lenders will negotiate with a borrower who wants to pay more points in exchange for a lower rate, so you may also want to consider waiting so that you can have more cash on hand to pay more points. The decision regarding mortgage refinancing is yours to make but you want the process to be worth your time as well.
And with some who go through a mortgage refinancing, the monthly payment may be lower but this might also mean that sometimes less of the principal is being paid as well. A person can actually lose equity in their home if they lower their payment too much. Sometimes a mortgage refinancing is done purposely to lower a minimum monthly payment, more so than just lowering the interest rate.
However lenders aren’t always clear about how this amount pays mostly the interest charges and hardly touches the principal. In some cases the minimum monthly payment doesn’t even cover the interest charges, so interest is then accruing on interest which is then added to the life of the loan.
While the monthly payments may be lower for this type of mortgage refinancing, that means that a 30 year mortgage needs an additional ten years or more to be paid in full – and of course there’s virtually no equity in the home at all.
So you see that in some cases a mortgage refinancing doesn’t always work. Equity can be lost and the principal hardly touched. The amount saved also cannot be worth the fees and costs, so this decision should not be made lightly.