Know what we hate? We hate going through mails and seeing an envelope bearing the words “URGENT LETTER” and “PLEASE EXPEDITE” — because rather than informing that a wealthy distant relative has passed on and have less than 24 hours to claim the inheritance, have the sneaking suspicion that…sure enough: another refi offer.
Don’t get us wrong — refinancing can be a boon to mortgage holders who are either locked in at, or have found themselves adjusted to, a significantly higher APR. Today’s featured Real Estate guide article, Refinancing Your Home, explains the various reasons people choose to refinance. But as syndicated columnist and “Mortgage Professor” Jack Guttentag notes in last Sunday’s column, many borrowers are being tempted by refi offers that would actually wind up making them poorer. These loan offers start off on an alarmist note (“Interest rates are going up!” “Qualifying guidelines are changing!”), but don’t despair — if you ACT NOW, you can still take advantage of their “money-saving” loan programs. Credit problems? No problem!
Reading the fine print, however, reveals minor details like the fact that incidentals such as taxes, title, and insurance are often not included in their APR calculation. Moreover, it turns out that making the minimum payment (i.e., the one they advertise prominently) may cause negative amortization. Finally, the predicted savings (not to mention the ability of the borrower to make payments) depends on housing prices continuing to rise. And as an increasing number of subprime lenders are painfully aware, that’s not always the case.
Here’s the thing to remember the next time you receive an “urgent” offer to refinance your home: The companies that send these loan offers don’t guarantee that you’ll be better off after all the new fees have been paid in order to get rid of the old mortgage. If you are seriously considering refinancing, proceed with care and do the math.