Home Refinancing Requires Caution

An increasing number of complaints are coming from homeowners who have succumbed to pressure from mortgage brokers and lenders to refinance their property or take out large equity loans. Many of today's refinancing transactions are definitely justified. If the situation is right, it can save substantial money every month and over the term of the loan.

Too many homeowners are persuaded to refinance when it is not to their financial benefit to do so. Sometimes multiple refinance transactions are promoted in a short time period. The only persons benefiting are the broker and lender who receive substantial fees for every transaction.

The Pitch

The promotional line usually goes something like this: "Refinance now and use the equity in your home to consolidate debts, go on vacation, start a business, or pay for a child's education." They may even list a very low interest rate and say there is no closing costs.

In many cases, what they don't quote up front is the list of high fees involved in each transaction and the fact that the "no closing cost" line means they simply add all those costs to your loan. You not only eventually pay those costs, you also pay interest on them. In some cases, the interest rate is increased to more than the prevailing rate to cover the closing costs.

The also seldom discuss what happens if and when you are unable to pay the new monthly mortgage payments. You can lose your home and your investment in it.

Increased Equity Tempting

It's no wonder people are tempted to tap the equity in their home. Property values have been going up significantly in recent years - like $200 billion last year alone. Nationally, home values have increased more than $700 billion since 1995, according to economists at the National Association of Realtors. As of last year, the homeowner's median gain in residential property values was about $28,700. In high appreciation states like California, the gain was more than $40,000.

Generating cash from growing home equity can be a very strategic move for some families, but keep in mind that it's not just free money. Those loan have to be paid back with interest. And consider the fees involved in each transaction - fees that seem to be consistently growing.

By all means, consider refinancing or acquiring an equity loan if you think it might be prudent to do so. But think it through carefully before signing an application document.

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