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When Refinancing A Mortgage Doesn't Help

Feb 2, 2008
Most of the time, refinancing your mortgage will result in a lower interest rate and/or lower monthly payments. It may shorten the length of time you have to pay on your mortgage until it's completely paid off. Refinancing can also help you use some of the equity in your home to pay off other bills- and many people use it to get themselves out of credit card debt, pay off personal loans or even their vehicles. The benefits of refinancing are many- but there are instances when refinancing your mortgage can do more harm than good.

Refinancing requires you to remove your escrow. Sometimes, a mortgage company will offer you a refinance deal; but it won't include your property or school taxes, and it won't include your homeowners insurance. For some people, this isn't a problem and setting aside the $60 a week (or whatever it may be) to ensure you have enough money to send out your taxes and homeowners insurance once a year is easy enough to do. For the majority of people however, it's all too easy to forget to set aside the money since it isn't due for months- and when the bills come in the mail, you suddenly have to come up with a few thousand dollars to pay them. If your refinance offer doesn't include escrow and you're used to having your taxes and homeowners insurance included with your mortgage payment- you might want to reconsider.

Also- if you're not paying attention to details, your refinance offer may seem like an amazing deal. Perhaps your goal is to use the refinance to also pay off some of your credit card accounts and your car payment. The payment may increase slightly- but after you add up the figures you find it's still lower than what you're paying now for your mortgage and each of the individual payments of the accounts your paying off. This is exciting! But if your refinance removes the escrow - you could very well end up paying more per month than you were initially keeping all of your payments separate!

Refinancing extends the terms of your mortgage. There are refinance offers that may result in a lower monthly payment- but in exchange for a longer mortgage term. Maybe before you refinanced, you had 20 years remaining on your mortgage. You refinance and the offer would require that you pay for 30 years in order to get the lower monthly payment. This can be an advantage or disadvantage, depending on your situation. If you are just in need of a reduced payment, the extra time on the mortgage may be worth it to you. On the other hand, if your purpose of refinancing wasn't because you were having trouble making the monthly mortgage payment, extending your mortgage terms will result in paying more over the long-term in interest.

Refinancing that doesn't reduce your principal balance. In some cases, refinancing a mortgage will result in lower payments that don't even change the amount you owe. For example, let's say you had a fixed-rate mortgage and owed $164,000. You pay a 5.375% interest rate and have 18 years left to pay on your mortgage. You might want to refinance to get a lower monthly payment because the $1186 that you currently pay is becoming difficult, so you look into a 5-year adjustable rate mortgage. The interest you're offered is 5.875%, with an interest only payment for 5 years. Your monthly payment would be reduced by $383 which is substantial and would probably make it easier to make your payments- however- over the 5 years on this adjustable rate, interest only payment plan, you would save $23,012 in monthly payments but the remaining balance on your mortgage would still be $164,000 at the end of the 5 years. If you kept the original mortgage and didn't finance, at the end of those 5 years, you would have paid your mortgage down to a balance of $132,975- over $31,000 paid on the mortgage! After 5 years on the interest-only adjustable rate mortgage plan, you would end up $8,013 poorer. (See the mortgage professor's explanation of this: http://www.mtgprofessor.com/A%20-%20Refinance/refinancing_that_makes_you_poorer.htm)
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