Lonestar Financing

The Pitfalls of Mortgage Refinances

We’ve all heard at some time or the other how great cash out refinances are.   At first glance they seem to offer more than one benefit; they roll all your debt into one thus allowing you to manage what you owe more easily; they generate extra cash that you can use for other much-needed expenses; and they also gain you lower interest rates. More than a good deal, wouldn’t you say? Hold your horses though, before you jump to conclusions and conclude that mortgage refinances can solve all your financial problems. They can’t, not if you’re not aware of the writing on the wall and do not abide by it. Refinances come with their own pitfalls, and here are some of the most common ones.

  • A home that reduces in value: Your refinance may have seemed like a great idea when you realized your home’s value had increased and that you could use the equity to pay off your other debts and get some cash for other expenses by opting for a cash out refinance. But this decision may turn out to be costly in hindsight when the markets drop and takes your home’s value down with them. You’ll find that you owe more that what you have in terms of the value of your home.
  • Additional efforts and costs: A new mortgage does not come free – it’s got all the hassles that your old mortgage had, from the trouble you had finding a good mortgage broker to the pesky extra fees you had to pay in the form of closing costs, property taxes (that are due on a home with a higher value) and whatnots. You also have to spend a considerable amount of time and effort on completing the paperwork and documentation satisfactorily.
  • Unscrupulous lenders: Most of us are not financial geniuses and hence put our trust in mortgage brokers and lenders to guide us as we weigh the pros and cons of refinancing our mortgage. Unfortunately, there are some mortgage lenders who engage in the practice called churning where they encourage homeowners to go for a refinance even though it’s not favorable to them. Finding a good and scrupulous lender is a key aspect that’s important to the success of a mortgage refinance.
  • Erratic and irresponsible spending: A refinance is an opportunity to put past habits behind you and start out on a clean slate. You must control your spending and not rack up more debts as you go forward after you refinance your mortgage or you’re in danger of ending up in a situation worse than when you started. You’re not even back at square one, you’re out of the playing board altogether, for now you have a huge debt on your home and additional debts like those on your credit card. In fact, you’re in danger of losing your home if you can’t make your monthly payments on your mortgage. 

This article is contributed by Sarah Scrafford, who regularly writes on the topic of luxury homes for sale in Canada. She invites your questions, comments and freelancing job inquiries at her email address: [email protected] 

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