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Make wise decisions on home financing
MISSISSIPPI STATE -- Refinancing a home mortgage can be a useful tool to free some income or speed up a payment plan, but it also can be an easy way to get into deeper financial trouble.
Bobbie Shaffett, family resource management specialist with the Mississippi State University Extension Service, said there are many dangers to avoid when purchasing or refinancing a home.
“Predatory lenders give loans to people who cannot afford them, so they end up losing their homes,” Shaffett said. “Others get in trouble by turning short-term debt into long-term debt when they use the equity in their home to pay off debts, such as credit cards or auto loans.”
Shaffett said the responsibility falls on consumers to know the terms of a contract before they agree to it.
“Many times, people simply do not know what they're signing,” Shaffett said. “Predatory lenders solicit low-income people and those they know are in financial trouble and offer them a loan. Consumers should be very wary before agreeing to these loans.”
Shaffett said consumers should educate themselves on the loan they are seeking and shop around for the best rate and terms. Prime lenders, such as banks, credit unions and some mortgage companies, usually offer loans at the best rates available.
Sub-prime lenders are willing to take more risks on the consumer's ability to repay a loan, but these loans are offered at higher interest rates. They may also have added costs, fees or penalties, such as a pre-payment penalty for paying off the loan early.
“First find out if you qualify for a loan with a prime lender and find out what the interest rates are there. If you don't qualify for a prime loan, you can shop around for a sub-prime lender and you'll have a better idea of what interest rate you should be paying,” Shaffett said. “Sub-prime lenders make buying a home possible for some people who don't have perfect credit.”
People looking to refinance a home should be sure they are making a wise decision.
Shaffett said there may be several good reasons to refinance a home. One good situation would be when interest rates have dropped about 2 points or more and the homeowner plans to stay in the home for more than three years. Watch for opportunities to transfer from a variable-rate to a fixed-rate loan or to shorten the life of the loan. It is usually a bad idea to refinance a home to pay off consumer debt.
Chris Burford, program director in Jackson with Consumer Credit Counseling Services, said it is wise to pay off debt quickly, not stretch it out.
“People often use refinancing to rearrange their debt. They turn short-term debt into long-term debt by borrowing the equity they have in their home,” Burford said. “Society pressures us to get loans and assume monthly payments, but these pinch budgets. Stripping equity out of their house to pay off debt can stretch their mortgage back to 30 years.”
Burford encouraged anyone thinking about home financing to be very disciplined about how they spend money and to learn exactly what kind of contract they are signing.
“Look at the documents, study the good faith estimate, and look at costs, the interest rate and the terms of the loan,” Burford said. “If you don't understand it, call somebody. Get referrals and check around before deciding to do business with a company.”
While some decisions to refinance are simply poor financial decisions, others can be devastating. Shaffett said some companies exist with the sole purpose of tricking desperate homeowners into signing away ownership of their houses, thinking they are salvaging their financial futures. Equity stripping and foreclosure rescue deals are types of this illegal financial scam.
There are many non-profit financial counseling services available to help people make wise financial decisions. Consumer Credit Counseling Services can be reached at (800) 251-2227.