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Mortgage Refinancing > Mortgage Refinancing Has Perils As Well As Perks
Mortgage Refinancing Has Perils As Well As Perks |
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With shooting home prices, steady mortgage rates and tight budgets, mortgage refinancing is all the rage among American homeowners. But though equity is capable of doing wonders for a homeowner's cash flow, it can just as easily get out of hand to result in financial ruin. This was the lesson learnt by Jim Butschii, 46, of Kenosha, a married father of three daughters about the pros and cons of mortgage refinancing. Earlier in the year, he pledged 90% of the value of his home for the money to pay off debts. It led to an extra $400 to $500 for his expenses every month. He explains that before long, he ended up making purchases and spending money in places like grocery stores, school, books and clothes. Next thing he knew was that his debt had multiplied by thousands of dollars. He's now decided to take more fiscal responsibility to spend a lot less. That is the secret of a successful mortgage refinancing. The first three quarters of 2004 accounts for nearly $1 trillion in mortgage refinancing, per the Mortgage Bankers Association of America, in comparison to $2.2 trillion a year earlier when interest rates were lower. Refinancing made up almost half of all mortgages in the first three quarters of 2004. A key reason for the recent cash frenzy was the hike in national median home price and 11.3% in Milwaukee last year resulting in plenty more of home equity for homeowners. According to Michael Zimmerman, vice president for investor relations at MGIC Investment Corp Milwaukee, the first half of this decade witnessed a sharp increase in the percentage of cash out refinances. The primary reason was the appreciation of home price combined with a stock market crash affecting many consumers living off profits in the stock market. He cautions on underestimating a consumer's ability to maintain a lifestyle. Almost half the money from cash-out mortgages goes into paying down other debts. Mortgage refinancing is more about moving your debts than actually paying them off feels Stephen LaDue president and CEO of Affiliated Mortgage & Financial Corp in Wauwatosa. It can be advantageous as long as the new debt is more manageable than the old one. However homeowners need to avoid trading one set of problems for another. To make the most of mortgage refinancing, the best method is to be aware of the difference between two basic accounting concepts, balance sheets and cash flow. LaDue suggests looking at the back of a mortgage application, which is more of a balance sheet that lists what is owned and owed. The difference between the two is the net worth that remains if all debts are paid. Lenders seek this information to estimate the risk involved in a people asking for money. Taking out a new mortgage to pay off an old one and other creditors only rearranges debt. Mortgage refinancing is not a means of increasing one's net worth, but done in the right manner, it helps cash flow, as in the case of Butschii. Perry Miller, senior loan officer for USB Home Lending in Milwaukee, explains that it can be particularly handy to pay off high-interest rate credit card debt. Mostly the interest on a mortgage is lower than credit cards and while credit card interest cannot be deducted on income taxes, in most cases, it is possible on mortgage interest. The usefulness of mortgage refinancing is determined by the way the money is spent. Miller makes frequent suggestions for paying off the new mortgage quickly with extra principal payments that other experts agree with. Mortgage refinancing enables more room to save or invest and not to spend more elaborates Michael A Dubis, a Madison financial planner. Or else it only results in hurting oneself. He advises that it is crucial to ensure a new mortgage does not go beyond the one being paid off. Choosing a 10-year mortgage for a 30-year mortgage may lower payments but eventually it will cost thousands more. People in trouble with high credit card bills often use the extra money for getting deeper in debt as they spend the extra money on purchases leading to new obligations. Spending unwisely means a greater need for cash flow and if one's home does not continue growing in value, refinancing again becomes more difficult to clear the new debt. |
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