Time to Refinance?
Much thought should go into the idea of refinancing your home. Like anything else, refinancing has its good points and bad.
The most common reasons to refinance: to lower interest rate, to reduce the length of mortgage, to make home improvements or cover other expenses, to lock in a constant interest rate if you have an adjustable rate mortgage (ARM), to convert to an ARM to lower monthly payments, to escape a mortgage with a balloon provision and no conversion option, and/or to consolidate debt.
While all the above refinancing reasons are reasonable, there are many factors to consider. This process, as you already know, is time-consuming and often expensive.
Calculating Your Savings
Figure out the following: your current monthly payment, the original cost of the home, an itemization of refinancing costs, monthly payment after the refinance, length of time you plan to live in the house after the refinance, the amount still owed on the house, and the break-even point (calculate this by dividing the total cost of the refinance by how much you’ll save each month on your payment.).
Depending on your ultimate goal in refinancing, the above numbers should give you a good idea of whether or not it makes sense. If it still looks like a jumble to you, there are many online “calculators” that can assist you in investigating refinancing: https://www.ulc.com/Refinance/reficalculators and www.smartmoney.com for example.
A Cautionary Tale
Gary had racked up $30,000 in credit card debt while starting a new business. Since the value of his house had doubled since purchase and interest rates were low, he decided to pay off the high-interest credit cards and take out cash to do some home improvements.
Gary paid off all the credit cards with a home refinance and had $20,000 left for improvements. But he and his wife took a vacation, bought several expensive pieces of furniture, and used more refi money to splurge on Christmas gifts. Six months later, not one home improvement had been made. Gary’s credit card debt soon reached $30,000 again, he’d burned up all his equity, and his house payment was $400 more than before.
Many refinancers find themselves in the same embarrassing and costly situation. If you want to refinance, it’s a good idea to plan carefully before you do so:
1. Close your credit card accounts after consolidating debt.
2. Make home improvements right away.
3. Leave some equity in place for your security.