12 September 2007
Foreclosure doesn't just happen to people who don't make their mortgage payments. Your homeowner's association (HOA) can take your house or condo if you're not careful. In one case, a disabled California man lost his home in a foreclosure sale because he was $123 behind on his homeowner's dues. The house was worth $280,000. Unfair? Abusive? You bet!Read More »
What to Look At Before You Refinance a Mortgage
By Richard BarringtonNFNS Columnist
Understandably, mortgage
holders get excited when interest rates fall. Adjustable rate mortgage holders
can look forward to the possibility of their interest rates resetting to lower
levels, while fixed rate mortgage holders figure they can refinance to the
lower rates. Even so, there are a couple of factors besides interest rates that
you need to weigh before deciding to refinance. Specifically, it is important to factor in refinance penalties (also
called prepayment penalties) and closing costs.
Refinance or
Prepayment Penalties
Refinance penalties are charges you may be assessed if you
pay off your mortgage early. Not all mortgages have refinance penalties, so
check your mortgage terms to see if this applies to you. You wouldn't want to refinance
at a lower interest rate, only to find the advantage of doing so wiped out by a
refinance penalty.
Why do mortgage companies sometimes charge refinance
penalties? First of all, it costs money
to originate or acquire a mortgage. Second, if it is an adjustable rate mortgage,
the mortgage company may have offered a low initial teaser rate. In either
case, the mortgage company might legitimately anticipate recouping these costs
by earning interest over the life of the mortgage. If the mortgage is paid off
early, they need to be compensated for losing this opportunity.
Note that when you refinance, check not only your existing mortgage
but also your potential new mortgage for refinance charges. After all, you may
want to refinance again in the future.
Closing Costs
Closing costs a normal part of initiating any mortgage,
including a refinance. You may want to use a mortgage calculator to compare the
closing costs against the interest you will be saving, to see how long it would
take you to recoup those closing costs.
Because of closing costs, you won't want to refinance with
every incremental drop in interest rates. Wait for drops that are significant
enough to represent meaningful savings, even after accounting for refinance
penalties and closing costs.
About the Author:
Richard Barrington is
a freelance writer and novelist who previously spent over twenty years as an
investment industry executive.
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.