Lower Mortgage Interest Rate May Not Save You Money
Many people that are facing foreclosure begin searching for options to relieve their mortgage debts. There are many ways to save your home from foreclosure, including loan modifications and bankruptcy. However, not all options are created equal and finding the best option can be tricky. For example, many people assume refinancing their mortgage to obtain a lower interest rate is a great option. While this may be true for some homeowners, not everyone will benefit from refinancing and some may even be left worse off than before.
Refinancing Considerations
There are two big problems with refinancing a mortgage. First, there are many additional fees and costs associated with refinancing. When you refinance a mortgage you are taking out a new loan, not modifying your existing loan. Just like the original loan, the refinanced loan will be subject to appraisal fees, contract fees and closing costs. Many people are unaware of these additional fees and find it difficult, and even impossible, to pay these fees when refinancing a loan. Although these fees may be able to be rolled into the life of the refinanced loan, many people are surprised to find out they have added several thousand dollars to their new loan. After all, most people refinance to find financial relief, not take on more costs.
Second, refinancing a loan also creates problems in the amortization schedule. The amortization schedule is the schedule of payments that outlines how much of the monthly payment goes towards the principal amount of the loan versus the interest rate. In an average 30 year loan, the monthly payments go primarily towards interest for the first 15 years. Around the 15 year mark, your monthly payment begin to be split between the interest and the principal amount of the loan. When you refinance your mortgage the schedule starts over, meaning that any progress made towards the middle point is lost. You essentially have to start over on making primarily interest payments and paying very little towards the principal amount of the loan.
Better Options
There are many mortgage loan modifications that are available that do not require a new loan. Contact your lender to review your options for modifying your mortgage and, thereby, reducing your monthly payment.
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