Avoiding the Pitfalls of Mortgage Refinancing

Most families look forward to the day when the mortgage on their house will be paid in full, and they will no longer have to make crippling monthly payments to the bank. Carrying a mortgage is not easy for many people. A large portion of the family income is often needed to make payments, and in some cases, the financial situation becomes so burdensome that the mortgage can no longer be carried, and the house must be sold. In difficult financial times, many families look to the possibility of refinancing the mortgage, either to make payments more bearable, or to provide some extra cash.

Refinancing a mortgage can make good sense, but it is essential for anyone considering this course of action to be aware of the possible pitfalls. This is a big decision to make and it should not be taken lightly. One needs to clearly understand the mortgage process and how it will affect one's future financial position. On the surface, a new arrangement may seem to be attractive, but it is quite possible that a heavy penalty will have to be paid in the long term.

One of the main factors to be considered is the equity contained in a property. If the current mortgage represents 50% of the property's value, most banks will be happy to refinance the mortgage to 75% of the appraised value while maintaining the same payments. The payments would have to be made over a longer period, of course, but this is better than losing the house, or having to deal with insufficient cash for day-to-day living.

Financial institutions that provide mortgages have a legal and moral obligation to be honest with potential clients. They will answer any question truthfully, but they will also assume that the client is knowledgeable about the facts, and they may not offer any explanation of the fine print. The onus is on the client, therefore, to be fully informed and to ask questions. Every mortgage is different, and it is important for clients to understand the details of their new financial obligations.

Many home owners who are seeking a refinancing arrangement look no further than the new interest rate. This is a big mistake as there are a number of other factors to consider as well. Will the new mortgage be open or closed, for example, and over what period of time will the new payments be made before the interest rate changes? Some mortgages require interest payments only, and while this may sound good, it is essential to have some plans for paying the mortgage off.

Finally, it is important to remember that financial services, just like any other services, are not provided without cost. The mortgage provider will charge a fee for arranging the refinancing, and clients will have to provide for that expense. The fact of paying this fee, however, should remind clients that they are paying for a service and they are entitled to receive value for money in help and advice.

Banks are required to inform clients about the closing costs that must be paid when the new arrangements are in place. This is important information, especially if the home owner is already in financial difficulty. These additional costs must be taken into account.

Refinancing, then, is a serious step to take. It may be necessary and it may be helpful, depending upon one's financial situation. But whatever the reason for refinancing, it is essential for anyone taking this step to be fully informed about all the costs involved.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.