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4 Reasons You Are Better Off Giving Refinancing A Miss
It is almost like a broken record hearing bankers and mortgage brokers keep talking about the overwhelming advantages of refinancing. It is as if any home owner who shuns it is as clueless as a kangaroo staring at the headlights. And the heavy irony of it all is that many of these “specialists” have never even refinanced a property at a personal level before. But of course, discounting their expertise and knowledge just because they have never done it themselves is like saying a doctor has no right to give medical consultations if they have fallen sick before.
For all the good that refinancing your mortgage can bring, there are certain instances as well when doing just that is actually not the savvy thing to do. If you speak to football fans, they will go on and on about the thrill the sport brings. And when you speak to the spouses of these fans, they will talk about how pointless and meaningless football is. So the information and opinion you get very much depends on who you speak to.
Since Propertylogy gathers opinions on pros of real estate and have no reservations talking about the cons, it should be mentioned that there are times when you should give refinancing a miss instead of going with the flow. Here are just 4 instances.
You have been repaying the home loan for many many years
The longer you are into your loan, the higher the portion of your repayments go into repaying the principle instead of interest. This is a situation that you will only run into after years of repaying. You won’t be able to buy your way into it. It is like wine where money cannot buy you mature authenticity.
If you replace you loan now with a new one, you are going to reset the payment portions. For most mortgage, you will be paying more interest than principle in the initial years. Slowly working your way to higher principle portions all over again. In this case, even if you could save 1% on a new loan, it could be unwise make the switch.
Your credit have turned to the dark side
A huge number people with bad credit are not in that situation because they are money-sucking vampires who refuse to rightfully repay what they have borrowed. It could be because of disputes or because someone else have taken a loan with their names as a third party guarantor. And sometimes, even circumstances that divorces lead to can wretch havoc on your credit status.
The odds are that if you have a questionable credit record, you should have a feeling about it. It could be that you have left an outstanding balance in your credit card for ages, the car transfer caused problems in your vehicle loan repayment records, or simply because you have refused to pay for unauthorised transactions which the bank decline to acknowledge as such.
When you have a less than super-duper credit, you might find it a challenge to qualify for the type of interest rates that make it a no-brainer to refinance to. Don’t do it just for the sake of doing it.
You are attempting a refinancing ponzi
You could have maxed out a home equity loan a year ago and already starting to see yourself potentially falling behind payments soon. So you have the bright idea to get a new loan to repay the current one, while at the same time taking out more cash as property value have risen. The hell with conventional wisdom. You are the master of your own destiny and will do what it takes to stay afloat.
Doing this is just a short term financial fix. The fact that you have run into this situation indicates that there is a more fundamental problem with you rather than cash flow and being unlucky. And if getting cash is your objective, you might even end up with a more expensive loan to start with. The strategy of getting out of debt by going deeper into debt sounds flawed by just the sound of it. You are better off identifying the source of your problems by pushing you ego aside and face them head-on.
You need to lose money before saving it
When the goal of refinancing is to save money, it sure sounds ridiculous that you have to cough out a hefty payment that puts you immediately into negative territory before even getting the new funds. Many home loans come with unfriendly prepayment penalties. And many come with subsidy clawbacks as well. If we are talking about a $250,000 loan and $3,000 subsidy clawback, a 2% penalty means that you will have to incur a $5,000 penalty plus a $3,000 clawback for redemption. How much are you going to save when you put these numbers into perspective? And how long will it take to move back into the black?
The good thing with penalties is that they always come with an expiry date. So you can avoid all these extra costs as long as you go about your business after their expiry dates. Avoid bankers or brokers who insists that you have to do it now to avoid rising rates. Nobody can predict the future and make you decisions based on information about the current rather than the potential future.