Wednesday, September 15, 2010

Mortgage Refinancing Mistakes


Mortgage Refinancing Pitfalls

Thinking about mortgage refinancing? You’re not alone, with some of the best mortgage rates available in history many people are debating whether they should spend the money and refinance.

The benefit of refinancing comes from borrowing at a lower mortgage rate so you can either lower your payments or reduce your loan term, either way saving thousands of dollars over the life of your home loan.

However, there are some pitfalls to watch out for; here are some of the mortgage refinancing mistakes you want to avoid:

Paying High Closing Costs

When you refinance, you are essential getting a new mortgage to replace your old mortgage. This means fees; origination fees, administrative fees and other closing expenses.

Many people simply pay them, adding them to the cost of the loan and reducing the savings benefit of refinancing your home. Instead, shop around and compare costs between various banks and credit unions. Check out this article on how to lower your home loan closing costs.

Not Getting a Big Enough Discount on the Rate

Many people refinance because rates have dropped but then find that the difference in the interest rate wasn’t big enough to really save them money. If there is only a small difference, the closing costs can erode the savings you are getting.

If you don’t stay in your house for five to seven years after you refinance, this small difference can actually result in you losing out over all. The generally accepted rule of thumb is that the new rate should be at least a full percent lower than your current rate, and you should be planning to stay in your home for a few years.

Waiting Too Long for a Good Rate

It is tricky trying to predict how low mortgage rates will go. In some cases, you might wait too long, and then find that you missed your opportunity. At this point, mortgage rates are unlikely to drop very dramatically again in the near the future. Waiting for even lower rates could mean that you miss out altogether.

Look at the current rates, and then look at your mortgage rate. If you will be saving more than one percent, it might be worth it to just go ahead and refinance now. Rates are not likely to head another full percent lower, but if they head higher, you will have missed out.

Cash Out Refinance

One of the biggest mistakes that people make with mortgage refinancing is to get a cash out loan. In this type of refinance, you get a loan for more than you owe. For instance, if you owe $170,000 on your home, but it is worth $205,000, you might refinance for $180,000. You pocket the $10,000 difference between what you actually owe and what you borrowed. (Of course, closing costs can erode what you actually end up with.)

Cash out refinances can be an issue for several reasons. First of all, you are adding to your debt. Another concern is that your cash out finance could put you above the 80% loan to value ratio, and result in the necessity of paying private mortgage insurance, which adds to your costs. Some people like to do a cash out refinance and pay off consumer debt, but if you are not careful, this could land you in even more trouble — especially if you just run up the balances on your newly paid credit cards.

In the end, it’s better to avoid a cash out refinance if you can, and just stick to refinancing what you actually owe on your home mortgage.

Written by Miranda · Filed Under Home Owner, Loans, Real Estate >Comments (1)
Waterproofing Your Basement Against Costly Damage

Basic basement waterproofing can be done for a relatively low price; much cheaper than the eventual cost of long term water damage that can result in your foundation and finished basement walls and carpet.

Basement water damage can take several costly forms and often the wet basement isn’t caused by water from a roaring flood but rather the slow and steady rain storms and thawing snow of the spring. The reason water can be such a nasty enemy to your home is that it’s relentlessly wearing away at the base of your house without you even realizing it. The good news, as I mentioned at the start, is that you can make some relatively cheap changes to help protect your basement walls and floor.

Water Management

Start off by routing the water from your downspouts away from your house to help maintain a dry basement. Splash blocks aren’t good enough, they still dump the water pretty much at the base of your foundation and it runs right back down to your basement. You can use metal guttering (around $9 for 10 feet) or plastic extenders (about $7 for 4–5 feet) to run the water at least 4 feet away from your house.

Ideally the area around your house was graded at the time it was built so that water runs away from your home. If you have areas where water pools near your house during a heavy rain you’ll want to get out there with a shovel or maybe a Bobcat and give the water a place to flow away from your house. Water that collects around the base will eventually find it’s way down into your basement. You can also add soil all around the base of your house to help prevent water from creeping down between the dirt and the foundation.

Sump Pump

Another weapon you can use to try and keep a dry basement is a sump pump. This is basically a pit in the floor of your basement with an electric pump in it. Since the pit is a low spot, the water collects there and the pump pushes it up a pipe through your basement wall and out into your yard.

Make sure the water from the pump isn’t being emptied right outside the wall of your house, run it at least 4–5 feet away so the water doesn’t run directly back down into the sump pit. If your basement is finished and carpet water damage is a concern you’ll also want to install an alarm on the pump to let you know if it stops working, and possibly even a backup, battery operated pump.

Newer houses are often built with a drain around the edges of your basement floor to channel the water all around the foundation into the sump pit, where it’s pumped up and away from the house. If you don’t have this drainage in place you might be able to add it but the sump pump and additional drains have left the “cheap solution” range and entered the expensive zone.

Next lets look at the cost of not waterproofing your basement and how that compares to the cost of prevention.

Foundation Damage

Your foundation is your main barrier against all the water that wants to seep, or rush, into your basement. If you don’t route your downspouts and water run-off away from your house the soil in those areas can become pretty saturated during extended weeks of rain. Since your foundation is resting on that soil, if the ground shifts, that puts can put pressure on your foundation.

For example, if you have downspouts dumping at either end of your house and those corners get soaked during spring rains, the corners of your house can shift down and cause stress and cracking at weak points in your foundation. Once cracks start to form, then it’s even easier for water to creep into your basement. Cracks in the foundation are certainly not cheap to patch, the cost depends on how large they are, which direction they run (horizontal vs vertical) and whether they’re on the inside of the wall, the outside, or go all the way through.

While keeping the soil moisture levels consistent around your foundation can help combat stress and cracking it can’t prevent it. As the ground freezes and thaws the soil will shift, which can also cause cracks. So the best way to keep the water out is to keep it away from your house.

Water Damage

If water does get into the basement one of the biggest concerns is mold. Mold just needs a little moisture and some organic material like wood, wallboard, or even dust particles to start growing. Getting rid of mold is not cheap if you have to hire professionals. When I called mold remediation companies for price quotes it was going to be $600 just to get an air quality sample done in the basement. Then if the sample comes back with high mold levels then you’ll have to pay even more to take care of it.

Wet carpet, pad, and wallboard are all prime places for mold to grow so even a tiny leak in your basement can be enough to start feeding a mold colony. Even if you divert the water on the outside, basements can be damp so running a dehumidifier is a good idea. Ventilation and the exchange of air in a damp basement can help keep the mold at bay.

Prevention is Cheaper

Problems with water leaking into your basement and basement mold don’t just pop up overnight. If you keep an eye on the sneaky moisture trying to soak its way into your basement and do what you can to prevent it you’ll certainly save yourself money in the long run.


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