Education for Justice FACT SHEET C-9 Fall 2009
THINK HARD BEFORE REFINANCING
WHAT DOES REFINANCING MEAN?
Refinancing means getting a new mortgage on your house or a new loan to take the place of the one you already have. Many banks and finance companies offer refinancing. Some advertise it on TV as a “magic” fix for people with debts because you can take out extra money to pay other bills. Others send offers in the mail, by e-mail or call you on the phone. They make it sound like you can solve your debt problems just by filling out a form. Refinancing is tempting, because it can get bill collectors and creditors off your back. But in many cases it will just dig you into a deeper hole. Be careful!
Refinancing often has hidden costs and fees, and other loan terms. Even well-known lenders sometimes make unfair refinancing deals. Do not sign a refinancing deal before talking to a trusted financial advisor.
You can get help from:
· Don’t Borrow Trouble (612) 312-2020
·
The
· HUD Housing Counseling 1-(800) 569-4287
They can tell you about agencies near you that offer credit counseling, foreclosure prevention, and can help you decide if refinancing is a good idea for you.
DO NOT REFINANCE YOUR HOUSE TO PAY OTHER BILLS
If you cannot pay your mortgage, you will lose your house. This is much worse than anything that can happen to you for not paying other types of bills, like credit card bills, utility bills, or hospital bills. None of these bills can affect your house.
A mortgage is a “secured” debt. Secured means that you put up “collateral” – property that the lender can take if you do not pay. Credit cards are not usually secured. If you do not pay, they can sue you, get a judgment, and then collect it by taking money from your wages or bank account. But they cannot take your house! See our fact sheet, Your Rights in Garnishment.
The general rule is, never turn unsecured debt into secured debt. In other words, do not use a home mortgage to pay off your credit cards or other credit debt. If you are thinking about doing this, talk to a credit counselor first to see if it makes sense for you.
DO NOT LET A DEBT COLLECTOR TALK YOU INTO REFINANCING
It is a debt collector’s job to get their money any way they can. There are other ways to deal with them. See our fact sheet, Your Debt Collection Rights. If they want you to refinance, just say NO!
NEVER TURN YOUR CAR LOAN INTO A SECOND MORTGAGE
If you cannot pay on a regular car loan, only your car is repossessed. Do not get a mortgage to pay off your car loan!! If you take out a mortgage to pay off your car loan and then you fall behind on your mortgage, you will lose your house. It’s better to lose your car than your home
IF YOU ALREADY HAVE A LOAN WITH A FINANCE COMPANY, DO
NOT REFINANCE WITH THE SAME COMPANY
Ask the company to lower payments on the loan you already have. Do not let them talk you into refinancing. You can end up with higher interest, and many new charges.
NEVER REFINANCE AT HIGHER INTEREST
The interest on the new loan must be lower than the interest rate you are paying now, or you lose money – lots of money.
AVOID ADJUSTABLE RATE MORTGAGES (ARMs)
Some companies will try to sell you a mortgage with really low monthly payments for a short period of time, like 2 or 3 years. This can seem like a good deal because those early payments might be less than the amount you are paying on your current loan. BUT, these loans are usually a trap! After the first couple of years, the payments “adjust” to a rate that is usually much higher than the beginning rate.
Many loan officers will tell you that you can just come back and get a new loan if the payments get too expensive. This is a common fraud in the mortgage industry. There is no guarantee that you will be able to get a new loan when the payments increase. Even if you are able to get a new loan your principal balance will have increased several thousand dollars because of the fees that go along with 2 different refinancings. If possible you should get a fixed rate mortgage that lasts for 30 years. That way you know what the payments will be for the entire time you have the loan.
ONLY REFINANCE IF YOU CAN GET A LOWER INTEREST RATE AND
MORE AFFORDABLE PAYMENTS
Only consider refinancing if the new loan has a MUCH lower interest rate (at least 1 full percent) and your payments will be the same or less on the new loan. NEVER do it if the refinance has a “balloon payment”. A balloon means you make a low monthly payment for a time – like a year or several years - and then you have to pay the whole rest of the loan off in one payment (this explains why your payment is low – because you’re not paying off the principal, only interest). The balloon payment can be thousands of dollars. If you do not have the money when it comes due, or cannot get a new loan to cover it, you will lose your house. Even if you can get a loan for it, it’s not a good deal because you have to pay all the fees for refinancing all over again.
BEWARE OF EXTRA CHARGES
You will have to pay certain fees to refinance your mortgage. Most refinancing deals will have “points,” broker’s fees, title fees, and other charges, in addition to the interest. Make sure you know how much all of these will cost you ahead of time and ask questions about any charge you
don’t understand.
Beware of “extras” like credit insurance. Credit insurance is a bad idea for most
borrowers. But many lenders will try to
sneak it in or make it seem that you must buy it in order to get a loan. They make a lot of money from selling that
insurance, and it doesn’t do you much good.
The amount of fees you will have to pay to get the loan (including all
the costs associated with the new loan) should not be more than 2 or 3 percent
of the loan amount.
WATCH OUT FOR PREPAYMENT PENALTIES ON YOUR OLD
MORTGAGE
If you are thinking about refinancing a loan that you have
had for only a few years, be sure to ask the loan officer whether you will have
to pay a penalty to pay it off early.
Many mortgages have a “prepayment penalty” clause which says that if you
pay off the loan within the first 3 or 4 years you have to pay a penalty to the
lender. This can be a lot of money –
usually 2 or 3 months worth of payments – and you should consider it when you
are adding up the total cost of getting the new loan to decide whether it makes
financial sense for you to refinance.
YOU HAVE 3 DAYS TO CANCEL ANY REFINANCING THAT
INCLUDES A HOME MORTGAGE
You should get a Notice of Right to Cancel when you refinance. You can fill it out and return it within 3 days to un-do the whole thing. If you do not get that notice, and want to cancel the refinancing, write a letter saying, I do not want to refinance, sign and date it. Keep a copy. Hand deliver it, or send it by certified mail to the bank or finance company. Save the certified mail receipt.
|
MN Legal Services
Coalition |
Do not use this fact sheet if it is more than 1 year old. Write us for updates,
a fact sheet list, or alternate formats. Fact Sheets aren’t a
complete answer to a legal problem. See a lawyer for
advice. |