A costly mortgage can do more than drain money out of one’s personal bank account. An expensive mortgage may actually lead to foreclosure. High interest rates on mortgages could very well make meeting monthly mortgage obligations very difficult. In the recent past, large numbers of home foreclosures were the direct result of adjustable rate mortgages reaching a point where meeting monthly obligations became impossible.
Even if things do not reach such dire and cataclysmic levels, paying more than what is necessary with a home loan doesn’t make wise fiscal sense. Refinancing to a lower rate would be much more fiscally prudent than sticking with a mortgage that is overpriced.
Any attempts to take part in a refinancing offer should come with a helpful amount of “buyer beware” concern. Refinancing, in theory, is supposed to help lower costs. Not all refinancing companies serve perfect deals. In truth, there may be hidden costs capable of driving up costs. Who would want that out of a refinancing arrangement?
The Early Payoff Fee
The first annoying fee to beware of does not even come from the refinancing service. Ironically, there may be a “hidden in plain sight” fee on the original mortgage. The terms of the mortgage might come with a penalty/fee when the loan is paid off before the regularly scheduled final payment. The prepayment penalty could amount to several months of interest, which might be costly.
This “hidden” fee really is not hidden since it would be listed in the mortgage contract. The trouble is some borrowers do not read the terms and rules thoroughly before signing. Those surprised about a prepayment penalty might end up with second thoughts about refinancing depending on the overall expense of the penalty vs. the savings with the new loan.
Prepayment penalties may not be an issue for every mortgage holder. Certain states outlaw the penalties. FHA and VA loans do not apply them.
The Cost of Processing
Mortgages are not refinanced on a handshake agreement. New contracts and additional paperwork must be drawn up. All that work comes with a cost. The costs do need to be factored into overall expenses by the person who is choosing to refinance a home loan.
Paying a few hundred dollars on processing costs and paperwork may both shock and enrage those who never expected to be hit with such fees. Unfortunately, there is no way to escape the costs with the exception of simply choosing not to go through with the refinancing.
A financial institution that chooses to refinance a home mortgage surely wants to be sure of the value of the home. Any entity lending money to finance or refinance a home loan positively must make sure the home is not loaded with hazards or problems capable of bringing the value of the property down. The lender cannot ignore the possibility foreclosure may be required. Lending out more money than what the property is worth adds even more losses on those a foreclosure inevitably causes.
That said, the lender is not going to cover the costs for a property inspection nor for an appraisal. The would-be refinancing client ends up paying those costs. Remember when the idea behind refinancing was to save money? That idea can end up buried beneath all the added costs lumped into the refinancing process.
Insurance Adds Costs
Homeowner’s insurance and title insurance are required when refinancing. Not too many people would take the massive risk of not carrying homeowner’s insurance. Some might want to lower their coverage limits which, in turn, would lower their premium. The lender is sure to demand full coverage in terms of rebuilding the property is in effect. In the event of, say, a fire, the lender is relying on the settlement amount to recoup the loan balance.
Refinancing is not inherently bad. Refinancing can, and does, save people money. Still, the company doing the refinancing wants to make money from its endeavors. Homeowners interested in refinancing plans need to be aware of this and adjust expectations accordingly. Otherwise, disappointments and increased cost end up being unavoidable.