Why Refinancing Can Be Surprisingly Tough

Posted on July 7, 2008. Filed under: -- Money Help (in simple terms), -- Real Estate Guide For Today's Market |


 

By  Molly Greaves

Despite low interest rates and plenty of competition among lenders, would-be refinancers are finding it anything but easy to get new loans. According to Money Magazine’s Gerri Willis, here’s why.

HIDDEN CHARGES: She isnt talking about closing costs. As a homeowner, you should already be aware of these costs. She’s talking about the PREPAYMENT PENALTY PROBLEM. 

She says that many people that took out loans in the past few years are on the hook for anywhere from 1% to 3% of the loan value when they refinance. The penalty may gradually phase out, reducing from 3% the first year, 2% the second, 1% in the third.

WHAT TO DO: Total up all of the fees for a new loan, and you can then see how the bill might swap out the savings you get from a lower rate. You can use the refinancing calculator at bankrate.com to see if you’ll come out ahead. If you won’t, you may have to wait a year or two for your prepayment penalty to expire. 

She also adds that one other thing to do is to look at the APR when you shop. This is the effective interest rate you’ll pay on your loan, rolling in one-time fees, and it’s the critical numbers for comparing mortgage offers.

PROBLEM–SHRINKING EQUITY: With every refi comes a new appraisal. You may find that your house appraises for less than you expected. Worse, you find out you owe more than your home is worth. 

WHAT TO DO: The article suggests inspecting the bank’s appraisal carefully. Does it describe your property properly? Remember, some appraisers conduct appraisals from the street (!) and may not be able to see all of your upgrades like a new kitchen since the last time they were in or a refinished basement.

PROBLEM–STEEPER RATES: Lender’s (finally) have tightened credit standards for all borrowers. Plus, some are even now tacking on their own small % to cover their risks.

 WHAT TO DO: Find out what rate you qualify for. (You can do this by getting your credit score)  You can do this by using a tool at myfico.com labeled “The higher your FICO score, the lower your payments” to see what someone with your credit score would likely pay per month. 

Study and look at your credit report VERY carefully to make sure there aren’t any errors. Chipping away at your credit card debt will also help you refi probably. Today, she adds, many lenders are penalizing you if your card balances eat up more than 35% of your available credit compared with 50% recently in the looser times. 

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