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Why Not To Refinance Mortgage Loans
By EchoBay Loans Staff Writer

You see signs all over the place saying "Refinance Now" and "Interest Rates Have Never Been Lower". From the looks of things, you could assume that there would never be a reason not to refinance your home. However, it's important to remember that while there are many good reasons to apply for a refinance mortgage loan, there are also many situations that would make refinancing a bad idea.

The first thing to consider when thinking about a refinance mortgage loan decision is where interest rates are at and what interest rate you currently qualify for. If interest rates have gone up, you're probably not going to want to throw away money by refinancing your home at a higher rate. If interest rates are down, but your credit has suffered some major blows, you're also going to want to reconsider refinancing.
Better credit scores mean lower interest rates, and if your credit score has gone down, you probably won't qualify for an interest rate that is lower than the rate you had when you first purchased your home.

Another factor that might make refinancing a bad idea is a substantial decrease in your income. If your income level has decreased by a significant amount of money, you may no longer qualify for the loan amount that you would need from a refinance mortgage loan. Even if you were to opt for a stated-income or no-doc refinance program, it would probably be attached to a much higher interest rate, making the process fruitless.

In addition to a lowered income, increased debt might also create a conflict for those wishing to refinance. People have always said that lenders only like to lend money to people who really don't need to borrow it. While that may be a stretch, it is true that those with blemished credit, lower income levels or higher debt to income ratios are penalized in the form of higher interest rates. Since the goal of a refinance is usually to lower one's interest rate, this could be a problem.

Even if the current interest rates are low and your credit rating and income levels all check out, there are other factors to consider when deciding whether or not to take out a refinance mortgage loan. How long you will be staying in the home after the time of refinance should be one of the main considerations that determine whether or not you refinance your home. Refinancing a home isn't free and it certainly isn't cheap. When you take out a refinance home loan there are certain costs involved such as the application fee, points, the appraisal fee, and other associated costs.

When you take the total cost of the refinance, and divide it by the amount you'd be saving monthly with your new interest rate, you get your break-even point. For example, if your refinancing is going to cause you to incur costs of $3,000 and you're saving $150 each month by refinancing, your break even point would be in 20 months. If you plan on selling your home before you would reach this break-even point, refinancing would mean throwing money away unnecessarily.

If you're thinking of refinancing to combine a first mortgage and a second mortgage, make sure that it's not going to bring your loan to value ratio to a point where you would need to start paying private mortgage insurance. Since private mortgage insurance can be quite costly, the amount you would save in interest might be negated by the cost of this additional expense. You'll also want to avoid refinancing if you've gotten yourself into too much debt with your home equity loan. Lenders don't look kindly on situations where borrowers have overextended their credit resources, and if you do qualify for a loan, your interest rate will be less than ideal.

Another thing you should avoid is refinancing to pay off serious credit card debts. If you found yourself in the clutches of enticing credit card offers and racked up thousands of dollars in debt before you realized what was happening, don't use the equity in your home for a cash-out refinance. Right now, your credit card debt is largely unsecured. However, your mortgage is secured with your home. If for some reason you weren't able to make the monthly payments on your new mortgage amount, you would risk losing your home. If your credit card debt has become uncontrollable, there are better ways to take back control of your financial situation than by putting your home on the line.

Whether or not it's the right time for you to refinance can only be determined by your personal circumstances and current interest rates. Knowing the pros and cons of certain factors that affect how ideal a refinance home loan is for you will allow you to avoid making any costly mistakes.


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