Refinancing Considerations

Keep These Things in Mind When Considering Mortgage Refinancing

Why consider refinancing now – especially with interest rates going up? [Actually, in spite of "expert" predictions, interest rates have decreased as 2008 begins.]

There are many reasons to refinance your mortgage – that is to replace your existing mortgage with a new one.

There are still people locked into higher rate mortgages. If today’s rates are a point or two under what they’re paying now, they can do the math and see if refinancing makes sense.

Other reasons for refinancing are that the existing mortgage is an ARM and there’s a worry about the upward adjustment that’s coming up. Or you have a balloon mortgage and the balloon is coming due.

You might have a house that has risen in value, so you might take some equity out in a refinancing. If you use that equity to pay for an addition to your home or a new kitchen, it might be a smart move, since you’re hopefully increasing the value of your home.

If you invest it in the stock market, that might sense too.

But, if you’re refinancing to pay off credit cards, auto loans or college tuition, this is not a particularly good way to use the equity in your home, especially if you don’t have the discipline to control future spending.

If you already have multiple mortgages combining them into one would probably save a considerable amount of money.

If you can now put down over 20% and want to get rid of your private mortgage insurance or want a shorter term, cutting interest payments substantially over the life of the loan, you can refinance, although there may be cheaper ways to achieve the same goal.

One of the problems with refinancing is that it is so expensive. There are fees piled upon fees when you apply for a mortgage. Then there are points, which is merely pre-paid interest.

So just because the rate is lower doesn’t mean you will come out ahead.

Get a list of all closing costs, add them to your new mortgage payment and see how long it will take to recoup your closing costs. You might find it takes two years or more before you actually save any money.

Before applying for a new mortgage, see if you can achieve your goals with your present mortgage. For example if you want to pay off your thirty year mortgage in 15 years, calculate how much extra you would have to pay each month and then include it in your mortgage check. You don't even have to notify most lenders of the prepayment, they'll just credit it to outstanding principle.

If you do that you avoid closing costs and, if you presently are paying a higher rate, you probably will still come out ahead.

If you now have the money to raise your equity to 20% or more, prepay that amount and ask the bank to cancel the private mortgage insurance.

The people who really should consider refinancing are those who can lower their costs of borrowing either through lower rates or a shorter term – ideally both.

You want a low rate, no points and minimal closing costs. Whether you can get these or not is another story.

Check the local banks and then go on the internet. You might find a bank on the other side of the country willing to give you the better deal than one you can get locally.

If you are going to refinance, check out the small print.

Will the new lender accept proof of homeowners insurance and not require you to pay insurance premiums through your escrow account? You save a lot of money buying your own insurance and paying for it as you please.

Will the lender require a prepayment of property taxes at closing? Some lenders like to have you prepay six months or more of taxes in advance. This money earns the lender interest. You get nothing.

This practice is banned in some states. Ideally you should pay one twelfth of your yearly real estate tax with each mortgage payment.

Real estate taxes are usually adjusted upward (when has a tax ever gone down?) mid-year and your mortgage payments will go up accordingly.

If you want, see if you can pay your own taxes and avoid the escrow altogether. Some municipalities will give you a discount if you prepay your taxes in a lump sum.

If you need help sorting out the offers and deciding if refinancing is the best move to make, consider a consultation with a fee-only based Certified Financial Planner. He should be able to help with the math and also help you decide whether the deal makes financial sense.

For more advice on how to shop for a mortgage read Finding the Right Mortgage.

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