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Information on mortgages, home equity loans, and consumer credit to help you use the power of financing to your advantage.
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Mortgages > Refinance
Mortgage refinancings: Don't assume they save you money
PATRICIA LAMIELL, AP Business Writer. Associated Press
Copyright Associated Press
NEW YORK (AP) - As long-term interest rates remain comfortably low, homeowners are lining up twice and three times to refinance their mortgages. Many of them shouldn't, mortgage experts say.
Refinancers can end up saving no money or even spending more for their efforts, said Stuart Feldstein, a mortgage and credit analyst in Hackettstown, N.J.
"Refinancing is the single hottest financial thing going on in the country," Feldstein said, "and here you have something that millions of people are doing and shouldn't be."
In the first three months of this year, 53 percent of the mortgages written were refinancings, an all-time high, according to the Mortgage Bankers Association. The MBA expects that number to average 43 percent this year, translating to 4 million to 5 million refinancings.
And millions more might be considering it. With 30-year mortgages now about 7 percent, as many as 15 million homeowners might consider refinancing because their mortgages carry an interest rate of 8 percent or more, said Brian Carey, economist at the Mortgage Bankers Association of America.
Bankers long ago tossed out the rule that interest rates should drop at least 2 percent below what you were paying before it became cost-effective to go through the refinancing process, which itself costs money and time.
The information available through computers and competition in the mortgage industry have pressured lenders to lower their service fees, so that some people may save money even if rates drop just a tenth of a percentage point.
Exchanging one fixed-rate mortgage for a lower one can save hundreds of dollars per month. Shortening the loan maturity, or swapping an adjustable for a fixed-rate mortgage, can increase monthly payments but save thousands of dollars over the life of the loan.
Refinancing may also be worthwhile for those who have a lot of principle to pay off. But for those with only a small loan, the cost of refinancing can be greater than the amount saved.
It also doesn't make sense for those moving within two to three years, because it usually takes that long to recoup refinancing costs.
The most frequent mistake, Feldstein said, is made by people who erase a substantial amount of equity in their home by refinancing the mortgage.
A homeowner with a 30-year, $100,000 mortgage, who has spent the last 10 years paying down interest on the loan and has just begun to pay down the principle, gets a new $100,000 for 30 years. He may get a lower interest rate, Feldstein said, but he's still erasing all of his equity and putting him back to square one.
"In many cases, the equity loss is equal to the monthly payment savings," Feldstein said. "They just keep restarting the terms of an amortizing mortgage, and end up with nothing to show for it. It's a shame."
Barry Havemann, president of HSH Associates in Butler, N.J., said many homeowners knowingly do just that. They use the equity in their home to finance other things like paying down higher-rate credit card debt, paying for home improvements, a car or education. In many cases, it makes good financial sense.
"Lots of people are perpetually refinancing and cashing out, taking every bit of that property value and doing other things with the money," Havemann said.
Alan Marinoff, a New York attorney, is intrigued by the idea of refinancing his Manhattan cooperative apartment and using the proceeds to buy a car or buy new furniture. But, he said, "I find that the shopping is kind of a nuisance," adding that mortgage lenders "play a shell game with all the fees."
Newspaper ads can be misleading, agreed Keith Gumbinger, an analyst at HSH Associates. "The terms and conditions for which they advertise are for the most optimum buyer under the best circumstances. You may or may not qualify for those loans."
Even homeowners who end up paying a little more over the life of a refinanced mortgage might decide it's worth it to them.
But Gumbinger advises refinancers to shop very carefully, ask a lot of questions, and "be ruthless. Are lenders aware that A-quality borrowers can pack up their marbles and go away instantly? Absolutely."
• Apply now for a home loan!
End adv for weekend editions July 25-26
Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission.
People: Feldstein, Stuart
Text Word Count 699
The tips on this website should be considered food for thought only. Lendingtips.com is a clearinghouse of ideas, not a professional adviser. Before any important decision, please consult the appropriate professionals (lawyer, accountant, real estate agency, broker etc.).
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• Mortgages > Refinance Articles Archive.
• ARM vs. Fixed Rate Mortgage. Use this calculator to compare a fixed rate mortgage to two types of ARMs, a Fully Amortizing ARM and an Interest Only ARM.
• Mortgage Loan Calculator. Use this calculator to determine your monthly payment and amortization schedule.
• Refinance Breakeven. Should you refinance your mortgage? Use this calculator to determine when you will breakeven!
• Amortizing Loan Calculator. Enter your desired payment - and let us calculate your loan amount. Or, enter in the loan amount and we will calculate your monthly payment!
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