The Disadvantages Of Refinancing Your Underwater Mortgage

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An underwater mortgage is an option that homeowners with adjustable rate mortgages may consider. For those with a mortgage at a high interest rate, but the rate is set to fall, refinancing to a fixed rate mortgage can be one way to make ends meet. Some people who own their home for only a few years are able to refinance without incurring any costs. This is because these mortgages do not require a huge amount of money upfront. In most situations, it is possible to find a lender willing to provide an underwater mortgage refinance option at a reasonable rate. Before applying for this type of mortgage, homeowners should be aware of its disadvantages.

Unlike a conventional fixed rate loan, a refinance does not allow homeowners to choose a specific length of time in which to pay off their mortgage. Instead, they are locked into their loan's terms for the entire life of the loan. If the homeowners decide to sell their home before the end of their loan term, they will lose any appreciation that they had made on their home. In addition, they will not be able to change their loan's interest rate until the original loan has expired. For homeowners who want to sell their home, this feature can severely limit the price they are able to ask for their home.

Another disadvantage to a refinance for an underwater mortgage is the potential expense involved. Because these mortgages are usually issued by unsecured lenders, they come with higher interest rates. As such, it is possible that homeowners will spend much more on the loan than they would with a conventional mortgage. In addition, some underwater mortgage lenders may require borrowers to have a large down payment in order to get a decent rate on their loan. Although this requirement may make the interest rates on the refinance loans a little higher than they would be if homeowners applied for a conventional mortgage, they may still be affordable for some homeowners.

A refinance option for an underwater mortgage also comes with an appeal to homeowners who are not financially positioned to refinance their primary mortgage. This type of loan allows homeowners who are upside down on their mortgage to take out a new loan with a substantially lower interest rate. The downside, however, is that because the homeowner is already upside down, the new loan may not be approved by traditional lenders. This can make the new loan a risky investment if homeowners are not financially prepared to deal with the extra responsibility and expenses associated with it.

The final disadvantage to a refinance option for an underwater mortgage is the potential dangers involved. Because the lender has issued a loan against the underwater mortgage, there is a chance the lender could foreclose if the homeowners continue to struggle with their payments. Many homeowners become nervous when faced with losing their homes and the sudden possibility of losing them, which is why these types of mortgages generally carry higher fees and costs than conventional mortgages. Although homeowners may be able to protect themselves against foreclosure by paying their monthly payments on time, it is still possible that they will face financial difficulties in the future.

With all the risks involved, it may not be the best option for homeowners to refinance their underwater mortgage. If you are upside down on your mortgage but are considering a refinance option, you should be prepared to pay more money to secure your mortgage and provide homeowners with the security of having a solid payment history. If you need help determining which refinance option is right for you, talk with an independent mortgage advisor or a trusted friend who has recently gone through a refinance to get a better understanding of your situation. No matter what decision you make regarding your underwater mortgage, be sure to weigh the pros and cons before taking out a new loan.