Bankruptcy prevention agent advises people to weigh pros, cons before purchasing homes
Many Carbon County residents may be considering purchasing or refinancing homes.
In the wake of the foreclosure crisis, it is important for consumers to take a hard look at the numbers to be sure a mortgage payment won't cause financial hardship, advised Ann House, Utah State University Extension bankruptcy prevention agent.
"If you want to buy now, first check your credit score," said House. "If your FICO score is 720 or above, you can get a lower interest rate on a loan. If your credit needs improvement, go to www.ftc.gov and find out how to rebuild it. The difference you will pay with a good score and a lower interest rate will be thousands, and possibly hundreds of thousands of dollars over the course of the loan."
Home prices in much of the country have dropped by 10 percent and will probably keep decreasing. But there's no way to know when the prices will hit the bottom.
"Another pro to buying is that a home can potentially yield cash at retirement through downsizing, relocating to a less expensive place or through investing the cash," said House.
Before jumping into homeownership, there are downsides to be aware of, warned House. With traditional pensions disappearing and with the debt burdens most consumers are carrying, it is increasingly difficult for people to save for retirement.
Rising costs of food, gasoline and utilities are also taking a toll on consumers.
Refinancing can lower monthly payments, reduce the length of loans and save money in the long run. But homeowners should determine how long it will take to break even on a mortgage refinance.
If refinancing will save, for example, $50 per month on a mortgage payment and the closing costs come to $4,000, it will take more than six years to recover the cost of refinancing.
"A general guideline is to consider refinancing a mortgage when the current interest rates are at least 2 or more percentage points below what you are currently paying," advised House.
Refinancing charges are usually between 3 percent and 6 percent of the total amount of the mortgage. And certain types of refinancing options contain penalties for early payments as well as closing and transaction fees.
"Make sure to do your math as, in some cases, these extra fees may offset any savings through the refinanced loan," cautioned House.
If the home's value has increased, people have the option of refinancing more than the value of the current mortgage, she said. The equity may be used for home improvements or other allowable expenses such as education, medical expenses or to cover closing costs of the refinance.
However, it is important for people to exercise caution since years will be added to the loan, more debt can be incurred and the home will not be building value if money is drained from its equity.
"If you can do it, a smart option is to refinance your mortgage for a shorter time period," she said. "Although the payments will be somewhat higher, you will pay less interest over the life of the loan. This will build equity more quickly and will save money in the long run."
Another option is to renegotiate the mortgage rate with the lender. Renegotiating is an amendment to the existing mortgage. Although the interest rate may not be as low, renegotiating can save money because there are no closing costs.
"We are currently experiencing a market correction to years of over-inflated home costs," concluded House. "Home prices are more realistic and lenders aren't as willing to loan out more than can be realistically re-paid. If you have a good FICO score and have been waiting to purchase, now may be the time to buy. If you currently have a mortgage at a high interest rate or not at a fixed rate, or if you have an improved FICO score, now may be a good time to refinance. It is definitely worth a phone call to your lender."