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Refinancing - Q & A
Refinancing is one option you have as a home owner to reduce your interest rate, lower your monthly payment and/or consolidate debt. However, is it the best choice for you? Following are some common and helpful questions and answers to consider before refinancing.
Q: Will it be worth it to refinance?
A: Start by analyzing your situation. The length of time you will stay in your home is probably the biggest factor. This will tell you if you have enough time to recoup the costs of refinancing plus save money. Most people feel that if they at least “break even” then refinancing is a good thing - wrong answer! Breaking even only benefits the bank. If you are not gaining a return on any investment in a realistic time frame, why do it? Refinancing typically benefits the bank because most people will either have some cause to refinance again before the break even point, or they will move. The longer you remain in your home, the more likely it is that refinancing will pay off for you. If you’re thinking about moving within 5 to 7 years, other types of debt consolidation such as a home equity loan or line of credit may be a better option.
Q: What are current mortgage interest rates?
A: If interest rates today are at least .5% lower than your current interest rate, then it may be a good idea to consider refinancing your current mortgage. Including some other debt may add another benefit.
Q: Is consolidating your credit card debt into your home loan better than how you are paying them now?
A: No, not really. If you compare financing your current credit card balances over the next 30 years, versus just paying them off in the next 5 years, you will pay a lot more money in your total amount repaid.
Q: What does consolidating really do for me?
A: Understand that consolidating smaller monthly bills will feel like a good thing in the short term. However, in the long run, you have taken bills you were “never paying off” and adjusted the payoff to 30 years. For example, if you borrow $1,000 to consolidate debt, with a mortgage interest rate of 6%, over 30 years you will have repaid $2,160. Whereas, that same $1,000 at 12% interest paid back over 5 years, has a repayment of only $1,335.
Q: When should you consolidate your bills with a mortgage loan?
A: The ideal time is after you have looked at your budget and decided that you want to convert non-tax deductible interest payments into tax deductible interest payments. This is a whole different reason that does make sense. You are now setting yourself up with a much lower required monthly payment for those months when things are tighter, like Christmas and summer vacations. For all those other months, you can still continue to pay the sum of your current payments plus your mortgage payment. With this approach you will pay them off just as fast (or faster if your mortgage rate is lower than your credit card rate) than if you did not include them in your refinance. If you just need cash for an emergency that came up, consider a home equity loan or a loan that does not have refinancing costs.
Q: What should I compare when shopping for a home loan?
A: A home loan has 2 primary areas of expense, closing costs and pre-paids. Closing costs are fees associated with handling and setting up your loan that are charged by a lender and/or title company. These are the real costs to compare between different lenders. They may include items like: credit report, appraisal, title insurance, title agent fee, origination fee, discount points, processing fee, document preparation, underwriting, tax service, flood certification and recording fees.
Pre-paids are expenses based solely on the value of your home and therefore vary from one property to another. These items are also used to establish escrow accounts for expenses that a servicing lender may pay on your behalf. These may include items like: property taxes, home owners insurance, and interest. Since pre-paid items are home, not lender specific, they are not good comparable items between lenders. Be careful not to get misled by a lender with lower pre-paids or escrows, these should be the same for any lender for your particular home.
Q: When should you lock in your interest rate?
A: For many people this is one of the hardest decisions to make. If rate and price were factors that brought you to your lender, chances are good that they are still the lowest. Now you must decide if the current interest rate is the lowest that will be available during the processing of your loan. Unless you are a bond trader or you have a crystal ball about the rates, lock in your interest rate for the time-period you need to get your loan processed and closed. Whatever you decide, move on and don’t worry about what interest rates do after that – you will just beat yourself up 50% of the time.
Now, enjoy your decision. You have made the best choice for you with the resources you have available. If you have questions or concerns before you decide to refinance, please contact us for a free consultation. We will be happy to discuss some options for your needs and goals.
