If you are one out of the 10.8 million American homeowners with an underwater mortgage, you know how financially challenging it can be to avoid foreclosure and recoup your home’s value. While refinancing is a popular option to get back on track with mortgage payments, it also has many pitfalls as well. By knowing common refinancing mistakes, you can avoid them and continue eliminating your mortgage debt. Many refinancing mistakes are common and can be avoided if you know to look for them.

How to Refinance Your Mortgage Debt Effectively

Knowing common refinancing mistakes also gives you the wisdom to make positive financial decisions. While record low rates make it a good time for refinancing mortgage debt, it creates a double-edged sword. Avoid these mistakes to pay back your mortgage debt without unneeded hardship.

Failing to shop lenders. The most common mistakes that homeowners make isn’t fully examining their options. By shopping a wide variety of lenders, you can find someone who has the best interest rates and terms for your situation. When refinancing, you want to shop around for the best choice – this in itself can save you thousands of dollars. However, be sure to also consider the cost of fees, as these can be costly and add up.
Over valuing your home. It’s important to remember that your home isn’t the same price it was when you bought it. Nationally, home prices are approximately 30 percent lower. Expect a higher refinancing offer if you don’t have enough equity.
Poor renovation timing. Whether you want to renovate for personal reasons or to boost the value of your home, do it before or after the appraiser comes. Since renovations mean your house will be a temporary mess, this can lower the appraisal value than it should have been if the appraiser comes during the renovation. However, waiting until the renovations are done are a great way to enhance value.

Recent studies show that Dallas has one of the lowest foreclosure rates in the nation, statistically only experiencing a third of the foreclosures that cities like Atlanta or Phoenix witness. Still, many families struggle with their mortgage, and foreclosure looms over them like their own fiscal cliff. Fortunately, refinancing options provide homeowners the opportunity to avoid foreclosure. If you cannot make your mortgage payments on time, consider refinancing the loan to fit your current budget.

Refinance Your Loan

Refinancing your loan is a perfect solution for those who have experienced a temporary drop in income or unexpected debt. Maintain clear communication with your mortgage lender to make the refinancing process easier. The sooner refinancing is completed, the sooner you can rest assured that foreclosure will be avoided.

• Begin once problems begin. Unless financial hardship completely strikes out of nowhere, you’ll have an idea that budgeting is about to become difficult. If you’re delinquent on your mortgage, the first 30 days after the missed payment is the best time to contact your lender. The chances of approval drop significantly 60 days past due.
• Consider deferred payments. If your financial hardship is temporary, your lender might offer a deferred payment plan that will allow you a 90-day grace period to regain your financial footing.
• Consider the HOPE for Homeowners (H4H) program by the Federal Housing Administration. This program helps homeowners avoid foreclosure by refinancing homes from stage one. Your home will be appraised and the H4H program could potentially fund 90 percent of the value of your home. Still, after refinancing you will still have to pay the outstanding mortgage balance with a 1.5 percent interest rate.

If refinancing isn’t an option at this point, contemplate meeting with a foreclosure attorney who can help protect your rights and finances.

The HARP 2.0 refinance program continues to roll out mortgage debt help for homeowners across the country. Just as some states have been affected by the foreclosure crisis harder than others, some of these same states are now being more successful in terms of the number of HARP mortgages they are closing.

Standing Apart

Since the first HARP was launched in 2009, 1.7 million homeowners nationwide have been reached. Despite falling equity levels, many at risk homeowners have been successful in refinancing a mortgage in order to lower their payments and stay on top of their mortgage payments. While the original HARP failed far below the expected 7 million, the revised HARP 2.0 has already surpassed those levels.

Some of the top states for HARP 2.0 success are:

• California, accounting for 14.5% of all HARP refinances
• Florida, accounting for 10.3% of all HARP refinances
• Michigan, accounting for 7.7% of all HARP refinances
• Illinois, accounting for 6.2% of all HARP refinances
• Arizona, accounting for 5.8% of all HARP refinances

In recent months the talk over reverse mortgages has gained momentum. With the new found refinancing craze in full swing, many lenders are also pushing reverse mortgages. But, what are they really about?

A Closer Look

One of the “perks” often described by advocates of reverse mortgages is quick cash. Basically, a reverse mortgage is a loan that is taken out of the available equity of the home. Essentially, you are borrowing against the home’s equity. Sounds like a good idea, but here are some concerns.

First, not everyone will qualify for a reverse mortgage. Only borrowers over the age of 62, who own the property used in the transaction will qualify. Further, the remaining mortgage balance must be low enough that it could be paid off with the proceeds from the reverse mortgage loan. This calculation often gets tricky and can be influenced by interest rates, home values and other factors.

Also, a reverse mortgage can create further financial problems. For example, obtaining a reverse mortgage lowers the equity in the home, thereby lowering the asset value of the home. A lower asset value can impact other loans and complicate inheritance transactions upon the passing of the homeowner. Also, the interest paid on a reverse mortgage loan is not tax deductible like a traditional mortgage loan.

Lastly, defaulting on a reverse mortgage loan can be problematic. Although the loan payments are not due until the borrower dies, sells the home or moves out of the property for 12 or more months, the responsibility is often deferred to family members or heirs of the estate. If the loan cannot be repaid, the home is generally taken back by the bank and a lien is placed on the property.

It is rare for someone to end up in foreclosure strictly because they got in over their heads in a mortgage, but it does happen. More likely, you bought a house you could afford at the time and your financial situation has changed due to employment or other unforeseeable circumstances. Regardless of how you came into mortgage debt, there are a few ways to avoid foreclosure now or in the future.

Right Now

If you are already in a home and suspect you may be at risk of missing a mortgage payment, there is still time to take action against foreclosure. First, consider your options. Can you afford to refinance your mortgage? Refinancing into a lower interest rate can lower you payments, lowering your risk of default. However, there are some out of pocket costs associated with refinancing that should be considered. What about a mortgage modification? If your credit is moderate to excellent, you may be able to modify your existing loan and reduce your payments. Talk with your lender right away to discuss your options.

In The Future

The trick to avoiding problems with mortgage debt is to buy within reason; and now just now, but in the future as well. Just because you can afford your monthly payment, doesn’t mean you can sustain this payment if your income level or amount of expenses were to change down the road. A good rule of thumb is to ensure that your mortgage payment is not higher than 25% of your total monthly income each month. Buy a home with a price that fits this budget. If you do decide to purchase a home outside of your comfort zone, be sure you have at least 3 to 6 months worth of mortgage payments saved in an account to sustain your mortgage in the event of financial hardship.

With interest rates hovering around historical lows, many people are tempted to refinance their mortgage. While refinancing can be a great proactive approach to dealing with mortgage debt, there are some tax considerations.

Mortgage Interest Deduction

Currently, owning a home allows you to reduce your taxable income by the amount you paid in interest towards your mortgage for that year. Deducting the cost of your mortgage interest from your taxable income can save you hundreds of dollars in tax liabilities each year. Sounds good, right? It is, but getting the most from this tax deduction is directly dependent on a higher interest rate.

When you refinance your mortgage you are lowering your mortgage interest rate. While this is also a good thing, you must remember that it will impact the amount of benefit you receive at tax time. Obviously, lowering your monthly payment on a mortgage is a great tool for saving money and lowering your risk of default, in the event of financial hardship; but it should be considered that you will not be able to depend on a lower tax bill come next tax year. That being said, it is a good rule of thumb to never depend on a tax return for your financial well-being.

Refinancing a mortgage is a hot topic right now as mortgage lenders are working hard to sell homeowners on the idea of lowering their mortgage payment. While a lower mortgage payment is enticing to any homeowner, refinancing isn’t the best decision for everyone.

Considerations

The first thing to consider when refinancing a home is the current state of your existing mortgage loan. Refinancing may not be the best of your foreclosure options if your home is already in default. If you have already missed a mortgage payment, chances are you are not going to be approved for a refinanced loan with a lender. Most lenders carry strict qualifications for approving refinancing offers and defaulting on your existing loan is likely to flag you as a borrowing risk.

Also, consider the amount of expendable cash you have. When you refinance a mortgage loan you will be responsible for paying the out of pocket costs on the loan. Since refinancing a loan creates a new loan, you will be charged appraisal, application and closing cost fees on the transaction. It is important that you have enough cash to pay for these fees when you refinance. If you cannot afford these out of pocket expenses, refinancing may not be for you at this time.

Refinancing a mortgage is also tricky when it comes to the type of loan and its conditions. Not all loans are the same and certainly don’t offer similar terms. Moving from a variable to a fixed interest loan can make refinancing a worthwhile pursuit, but never go from a fixed interest loan to a variable one even if the interest rate is lower. Additionally, refinancing should only be considered if the interest rate on the new loan is at least 1.5 to 2% lower than your current rate. Otherwise, the savings may not be great enough to outweigh the out of pocket expenses and lengthened loan term.

The Home Affordable Refinance Program was designed to help homeowners avoid foreclosure and find a solution to their mortgage debt problems. While the program has gained quite a bit of popularity in recent months, it is important to point out that not all mortgages are eligible to receive help.

Qualifications

HARP was not designed for all mortgage loans and, therefore, leaves some homeowners out of the running for help. The program was designed for conventional loans, specifically those backed by Fannie Mae or Freddie Mac. Loans that are not backed by Fannie or Freddie are not eligible to participate in the refinancing program under HARP. Further, Fannie and Freddie backed loans must have been secured prior to June 1, 2009 and homeowners must  not have participated in HARP or related programs in the last 12 months prior to applying.

Another hang up some homeowners are facing when pursuing the HARP program is that not all lenders are participating in the program. However, even if a current lender isn’t participating homeowners can still find help through one that is. The HARP website can help put homeowners in touch with a participating lender and help them shop around for the best refinancing offer among those lenders.

You’ve bought your first home, and going through some big career changes.  You recently got married, and now you’re thinking about starting a family in the next couple of years.  As you go through all of these life changes, chances are high that you will move in the next five years or so.  It could be across state lines, county lines, or just a neighborhood over.  However, you don’t plan to be in your neighborhood for too long.  If this describes you in any way, then refinancing is not right for you.

But, I Could Save Money!

Many people think that whenever their mortgage gets to be a little too much to handle, the simple answer is to look into refinancing.  However, refinancing is not for everyone.  If you don’t plan on staying in your home for at least two years, it’s doubtful you would even profit from refinancing.

Hopefully you have a flexible adjustable rate mortgage.  If this is the case, you’re in better shape than having a fixed-rate mortgage that is hard to move around with.  Just remember, if you’ve got this mortgage for a short run, refinancing isn’t going to help you much.

Closing costs are just the tip of the iceberg when it comes to all of the little fees associated with refinancing.  When it’s all said and done, you really have to stick it out for a while as a homeowner before you get to reap the financial benefits of refinancing.

If you are concerned about foreclosure being in your future, and you don’t plan to stay in your current home for long anyway, forget refinancing, and get rid of the mortgage as soon as possible!

Are you wondering what refinancing is?  Would you benefit from it?  What about loan modification?  These questions are just a few of the big ones that nearly every homeowner must face in this economy.  Refinancing can be a great option to consider if your mortgage is starting to feel just a little too burdensome and you fear the possibility of foreclosure.  However, it’s important to remember that refinancing won’t fix all scenarios.

Refinancing: What to Know

Essentially, when you go through the refinancing process you take a debt obligation – in this case, your mortgage – and replace it with a new one that has more agreeable terms.  That’s to say, you don’t actually do anything to your mortgage.  Rather you replace the loan you currently hold with a different one.

Before you even consider this option, it’s very important that you have a good credit score.  This is a new loan, so it’s the same story here as it is with any other loan.  Having a good credit score means getting better rates and better payment plans.  Even if your lender “knows you,” and even if your lender already held the loan you’re now replacing by refinancing, he’s still going to perform a credit check.

Having a good credit score can insure that you don’t waste anyone’s time, including your own.  If you don’t think you’ll be able to secure a better loan through refinancing, you might want to take care of your credit score first.  Once you have boosted your credit score back up, then you can turn your attention to refinancing!