by Anza Goodbar
(last updated November 22, 2011)
Several years ago, homeowners were enticed into loan products that were designed to create repeat business in the mortgage industry. These adjustable rate loans offered a lower rate for a two to three year term, after that point the interest rate would rise incrementally over the course of the loan.
This product was designed for customers that needed a short term financial tool to keep their mortgage payment low. The key to using this tool properly was to refinance before the rate increased. At this point, most people would opt into fixed rate mortgage at a lower rate for the term of the loan. This lower rate would save tens of thousands of dollars over the life of the loan.
In our recent economy, this plan failed many families. Thousands of families lost their jobs and making their monthly mortgage payments became a struggle. Late mortgage payments will cause a credit score to plummet as much as 30 points in a month. Over the course of a few months, this could destroy a good credit rating and make it impossible to obtain a refinance to lower interest rates and get a lower payment.
For severe situations, it is possible to petition the lending institution that holds the note on the mortgage and request a loan modification. Loan modifications are not easy to obtain, and are reserved for truly dire situations, but in an effort to prevent a default, many loan companies will approve a modification and lower your rate if there was a previous positive payment history and documented hardship. Typically, there are no fees associated with a loan modification.
Refinances can be expensive. Before making a final decision to refinance your home, check to see how much the lower rate will impact your payment. Credible loan institutions would advise a reduction of at least $100 per month to make the fees worthwhile. Also factor in the amount of time you plan to be in the house, most family moves on average every 3-5 years, so the cost of the refinance may be prohibitive in the long run.
Before refinancing, take a look at all of the factors involved in the process. Do a cost analysis to obtain a clear picture of the overall benefit of a refinance or modification. Relief in the short-term may be the most important factor, however, be certain to consider all factors of the big picture before sealing the deal.
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