The Downside To Refinancing An Underwater Mortgage

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The majority of homeowners refinance their underwater mortgages in order to lower monthly payments. However, not all homeowners are aware of the negative implications that taking out a refinance for an underwater mortgage carries with it. Although homeowners who refinance have to deal with the obvious disadvantage of needing to pay more money for financing because they can no longer deduct their interest expenses on their income taxes, there is an additional drawback that often goes overlooked. When homeowners refinance, they are essentially throwing their existing loan into "retirement." Here are some of the other disadvantages of refinancing an underwater mortgage:

First, while the federal refinancing tax deduction may help many homeowners save money, it may not be worth the sacrifice of additional interest payments on the underwater mortgage. Homeowners who are currently paying more than ten percent of their gross monthly income in interest on their home loan may not benefit from the federal tax break. In fact, many homeowners may end up paying more in taxes by refinancing the same mortgage and taking out a new one. Homeowners may end up paying more than the market will ultimately give them a few years down the road. In addition to this, homeowners may have to pay state and local taxes on the additional amount they will owe for paying interest on the loan.

Second, the longer homeowners remain in a loan, the more they will have to pay off the loan. The longer homeowners remain in a loan, the more likely they will miss mortgage payments and eventually fall behind on their house payments. This situation will likely lead to foreclosure proceedings. While a refinance may temporarily bring homeowners current debts down, they may still have to wait several years before the homeowners are finally able to afford their new loans.

Third, when homeowners refinance, they are essentially starting over again with the original lender. While the original lender worked with the homeowner to find a solution to the problems underlying their underwater mortgage, they will no longer be working with the homeowner. Depending on how long the homeowner has been delinquent, the bank or lender may not be willing to work with the homeowner to find a solution. This means the homeowners will be left with the same loan they had before going through the refinance process. For some, this is an acceptable outcome.

Fourth, there is the issue of late fees. When a person goes into default for any reason, they face penalties on their loan. These penalties will cause many people to delay refinancing their loans. This will only result in higher interest rates and costs. A refinance could easily push the loan into a negative standing. This will cost the homeowner even more money in additional fees and will delay the resolution of the loan.

Lastly, there are drawbacks to going through a refinance for an underwater mortgage. The biggest one is that a homeowner will likely need to sell their home before the end of the year in order to pay off the balance of the loan. In addition, many homeowners may have to accept a lower interest rate because the refinance cost more than the original mortgage rate. Although a refinance may be a good option for some homeowners, it is not for everyone.