To refinance or not refinance
Although advertisers talk about refinancing, it isn’t always a sure-fire way to find fast cash. Anyone who is thinking of refinancing needs to think about the pros and cons to the move. Chronic refinancers that always capitalize on lower interest rates don’t always profit over the long term. They have a long list of fees and closing costs that can add up and eat away at savings.
The reasons for refinancing
The first thing a homeowner should figure out is what their goal is for the potential refinance. People must be aware that refinancing only reorganizes debt. It normally is at a lower rate of interest, but other variables change the equation. Those variables may eat away at overall savings. Normally, reducing monthly payments is the most prevalent reason why consumers try to refinance, and debt consolidation is the second. According to Holden Lewis, an economist with Bankrate.com, “Consumers need to talk to a professional to do the numbers and find out if the goal really is worth it. Getting rid of debt is a great thing, but if the rate cuts down on income drastically, it may not be the best option.”
When to refinance
After honing on the reason a consumer wants to refinance, the next thing to decide on is when. The Bankrate 2008 Closing Cost Survey indicated the national average on closing costs for a $ 200,000 loan was $ 3,118. That is in addition to taxes, insurance and prepaid items like interest and association dues. A lower interest rate extends the length of the loan, and can cost more in interest, as one must be aware. For instance, a mortgage with 20 years left out of 30 will result in a higher amount paid in interest over the lifetime of the loan, and perhaps a larger interest payment if refinanced. There are two calculations to follow when trying to find fast cash from refinancing:
- One calculation where the new loan has the same term as the old loan
- One calculation where the new loan is the length of the planned refinance
From there, consumers can compare the interest savings to see if refinancing reaches their financial goals.
When to not refinance
There are specific instances when a refinance will not help. A homeowner that doesn’t plan on retaining a home for long, for instance, would potentially be better served by staying in the current mortgage. Considering the number of months of savings they need to recoup closing costs, it may take longer than they plan on living in the property. People with underwater mortgages should probably stay with the current mortgage. It’s highly unlikely a homeowner in an underwater position will find a lender.
Another reason to not refinance is hefty prepayment penalties. The penalty payment is another expense for homeowners to add into the total cost of the refinance. Homeowners might be better off waiting until the initial two or three years of the active pre-payment penalty has passed. Most likely consumers will have a better chance of refinancing further down the road.
What’s good about refinancing
Despite the tricky calculations regarding refinancing, it still can benefit many homeowners if done in the right way and at the right time. Refinancing can net some fast cash for people who are smart about the decision. A good financial planner or online banking tool can help steer consumers in the right direction when facing the prospect of refinancing or not.
