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Thoughts on refinancing your home mortgage

by Jeffrey Hammerberg

Looking to refinance your home mortgage? Take time to browse around and comparison shop, because lenders are highly competitive.
Many who bought homes during the peak of the housing boom used high-leverage, high-risk loans in order to keep up with the inflationary environment of sky-high prices. Along the way, mortgage lenders and banks became more creative (some would say downright reckless) at figuring out how to qualify people for loans that actually exceeded their reasonable and manageable monthly budgets.

Some bought more house than they could afford and used loans that did not require immediate repayment of principal, because they intended to flip the home and make a fast profit to pay off the loan. Others figured that if they could get into a home before prices got even higher, they could play catch up until their own careers or salaries grew, so they opted for loans with low introductory “teaser” rates that to adjusted higher later.

But if their strategies failed to unfold as planned — for example, if the “flipper” got stuck holding the property as prices plummeted or the person on a fast career track suddenly become unemployed — then these borrowers wound up in a precarious financial position. For that reason, housing analysts predict that between 1 million and 3 million American homes will be foreclosed upon by year’s end.

Meanwhile, the smart money is moving into reliable, predictable, affordable conventional fixed-rate 30-year mortgages. These loans have no risky bells and whistles, and with fixed rates hovering near their historical lows, they represent solid value that will sustain over the long haul, regardless of how high fluctuating rates may climb.

Many homeowners with expensive or high-risk mortgage loans are refinancing, and it can be a very wise move. But there are common pitfalls to avoid. As homeowners refinance to these less expensive loans en masse, many will make mistakes along the way. After all, haste makes waste, and this is especially true when borrowing substantial amounts of money.

To avoid the most common errors, here are some helpful insights from mortgage experts:

Don’t forget to check for pre-payment penalties
Before you exert any energy preparing to refinance, first study the fine print of your existing mortgage agreement — or have an attorney review it for you — and make sure that your loan does not have a pre-payment penalty clause. These pesky legal stipulations automatically sound alarm bells if you pay off your loan early, and you’ll be forced to pay a penalty to your lender. While most loans don’t have pre-payment penalties, it pays to be sure before you bother with any refinancing efforts.

If your loan does have a pre-pay penalty, that does not necessarily mean that you should not refinance anyway. If you can save enough money over the period of time that you plan to service the loan to more than compensate for the penalties, then go ahead and do it anyway. But first crunch the numbers with a financial professional, lender, or lawyer to make sure that paying the fees in order to switch loans is worth the price you’ll pay.

Try not to borrow or pay too much
The mistake that is most often cited by homeowners and mortgage experts is twofold. Consumers tend to pay too many closing costs, or refinance so often that they negate their positive financial savings by accumulating additional expenses that it can take many years to erase.

Get a written estimate of your refinance closing costs, and then figure out how much money you will save each month by lowering your monthly mortgage payment.

If you can save $200 a month, you will save $2,400 a year. But if your closing costs are $3,000 and you only plan to stay in the home for another two years, you won’t break even. On the other hand, if you plan to sell after 10 years you’ll save $20,000 — even after subtracting out your closing costs.

Do the math and you’ll avoid running the risk of going into the red while trying to get back in the black. Refinancing too often can be counterproductive because of the expenses involved, but refinancing wisely can save you lots of cash.

Shop around and then lock your loan
Take time to browse around and comparison shop, because lenders are highly competitive. You may want to stick with your same lender. But even so it is a good idea to get quotes from other mortgage companies, as a bargaining tool to get your lender to offer you a preferential rate or discounted closing costs.

Once you’ve established who your lender will be, decide what interest rate you are comfortable with and lock in the rate to avoid the risk that it might rise above your economic means. Get a written confirmation from your lender that the interest rate has been locked, to minimize any confusion or miscommunication. Then sit back and relax, because the heavy lifting is finished.

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