When is it Smart to Refinance?

The right time to refinance is when it will save you money. It's as simple as that.

However, it normally saves you money in the long run. In the short run, it's likely going to cost you money. Your costs could be penalties for refinancing, including points, fees, a new property appraisal (if required), and potentially title insurance. If you move from one lender to another, you can definitely expect to need an appraisal and title insurance. If you can refinance with your current lender, you may be able to avoid some costs, but this will depend on your lender and what that lender is willing to waive.

So, when will you most likely save money? There are three basic scenarios that generally work in your favor:

1. Interest rates are dropping, and you are locked in at a rate more than 1.5 % higher than the current rate.
2. You can reduce your overall monthly payments enough to offset any costs of refinancing penalties.
3. You have credit card debt that is not getting paid off, your payments are too high, and you are finding yourself in financial difficulty. (This is an extended circumstance of point #2.)

Let's look at the first scenario. You're locked into an interest rate that is too high. How can you be sure you'll save over the long run if you refinance? You'll have to look at the type of mortgage you have. If you have an ARM (most folks do) then you'll want to compare the lifetime caps of your mortgage versus today's ARMs to determine if your rate is high enough to justify refinancing. Also, the likelihood of saving money increases if you plan to hold onto your property for at least 5 years. If you are planning on moving in the next year or so, refinancing may not be the best option.

What's at issue is how long it will take to recoup the costs of refinancing and start to see a dollar benefit back to you. Let's say you've added up all the costs, and you've got a number of $3000. However, refinancing actually saves you $150 a month. It looks as if you'll have made back the costs in 20 months and your saving will then be yours. But, you have to be careful when calculating your benefits. There are catches.

The biggest is that you'll lose tax benefits by refinancing. Interest paid on your mortgage is tax deductible. If you are paying less on your mortgage, you'll also be claiming less on your taxes. As a result, depending on your tax bracket, some of your savings will be "clawed back" in tax. In fact, if your federal tax rate is 28 %, and you use the scenario we've used here, your real savings will be $108 a month (once your income tax changes are factored in). So, it will actually take you 28 months to get your costs back.

So, keep in mind the changes to your taxes when you are thinking about refinancing, and this will give you a true picture of the benefits to you.

It's the same calculation if you are refinancing to reduce your overall monthly payments, either by rolling credit card debt or other consumer debt into your mortgage. The overall costs should eventually "pay back" any cost to the refinancing. However, if you are doing this to avoid bankruptcy, then you need to consider your financial health first, and recouping your costs second.

If you have decided that refinancing works for you, be sure to comparison shop! Also, read all the fine print on your current mortgage. Some have prepayment penalties, and they can be quite high.

Posted by TheBlogMachine.com at 4:59 PM EDT

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Refinancing for Credit Problems

Unfortunately, in this day of high consumer debt, more people than you'd like to think will find themselves with this problem.

Refinancing is one tried and true remedy for the problem of high interest costs on credit card or other consumer debt. And frankly, once you have submitted a payment late on a credit card, the level of interest you pay can be truly punishing. I've seen examples of almost 30% interest when a person was late on as little as one payment. You really have to read the fine print with credit cards.

I've known many people who have gotten into their credit problems with credit cards. While credit cards are a modern day "convenience" and many transactions are hard to do without them, these same cards have become a serious difficulty for many of us. Many economists are starting to sound the alarm on consumer credit, because the US is averaging more money on credit cards than the per capita income. In short, we spend more than we make, and no matter how you add that up, it can't continue for long.

Having said that, refinancing for credit or debt problems is not something that you should do without help. Lenders are likely to 'punish' the person who is in this situation with high interest rates, and other penalties and fees. This is where it can really pay off to seek a reputable credit counseling organization, which can act as your advocate. Many of these folks can work with you and with reputable lenders to consolidate your debt and have you come out the other end paying lower payments while still getting the debt paid off faster than you would have otherwise.

Are any of these scenarios sounding a little too familiar? Take action sooner as opposed to later. Unfortunately, credit problems often get worse before they get better. The sooner you put out a call for help, the sooner you will be moving in the right direction with your finances. A reputable credit-counseling agency can help your financial situation get better much more quickly.

Ultimately, you don't want to lose your home if you own one. If you do own a home, you are in a much better position than many who are fighting with credit problems. You can use that home to help boost you out of the hole. Now's the time to do it.

Posted by TheBlogMachine.com at 4:57 PM EDT

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Refinancing to Reduce Interest Rate

Yahoo! The rates are dropping! But you've still got 3 years on your mortgage and you're paying a couple percentage points more than the going rate.

Your best option is to approach your current lender and try to get an 'early renewal' on your mortgage.

Some lenders will charge a penalty for early renewal. You will have to determine if the cost of the penalty is less than the savings you will get with the new mortgage. If not - you'll be best to wait.

Some mortgage lenders will renew early without penalty, but will give you a 'blended rate'. What this means is you will have a 'new' mortgage, and you will be paying a rate that is a 'blend' of your existing interest rate and the new current interest rate.

Confused? Don't worry. While it is a bit complex, it boils down to this - based on the term picked for the 'renewal' and the time left on your current mortgage, the lender will 'blend' the two interest rates. So you will be paying a 'blend' of your existing rate and the new lower rate. While you won't get a rate as low as the lender's current best rate, you should find that you will be paying a lower rate overall than if you'd stayed at your existing interest rate.

Again, do your homework. This is only a good deal if you have a fair amount of time left on your mortgage, and you are confident that interest rates won't fall a lot further! If interest rates continue to go down, and you are now locked into a longer term at the blended rate, you may find that it wasn't a good deal.

Still confused? Talk to a financial planner or advisor. They can take all the confusion out of this.

Posted by TheBlogMachine.com at 4:51 PM EDT

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Refinancing for Extra Cash

With the cost of homes, it's often better to buy what you can afford and remodel later!

Once you are ready to remodel, particularly if you've lived in the house for a few years or have some equity built up, you may find that your best option is to refinance.

Most lenders are willing to discuss refinancing to get you some more money. What they are really doing is looking at the current value of your home versus the amount you have mortgaged, and they give you some cash back from the difference. This means that your mortgage gets bigger - and the cash difference comes to you.

This can be a better deal than negotiating for a separate home improvements loan, but be careful! You always have to read the fine print:

1. First, be sure that you will not be paying fees to do this. Your mortgage lender already has your business, right? You are offering them MORE business, right? As long as you are a good customer, they should be thanking you! You are going to make them money. At worst, fees should be minimal, as long as your credit rating and history are good.
2. Second, be sure that the interest rate for your new mortgage is fair. Do some homework, and ensure that just because you are refinancing doesn't mean that your lender is taking an opportunity to get more out of you.
3. Be sure when you are comparing interest rates that you also look at the rates of home improvement loans. You may actually be better off to have a separate home improvement loan. However, it depends on whether you can handle the amount of the home improvement loan, as well as interest rate. Home improvement loans are often over much shorter periods than a mortgage. Therefore, even if the interest rate is much lower, you may have a payment which is too high for you to handle. So, you'll need to know both interest rates AND payment amounts to compare home improvement loans with mortgage refinancing.
4. Be sure that your mortgage lender knows that you are comparing options. If you want your lender to compete for your business, you should be knowledgeable. Don't be browbeat into something because they are 'doing you a favor'.

Once you have your cash in hand - happy renovating!

Posted by TheBlogMachine.com at 2:57 PM EDT

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Refinancing at Renewal

Your mortgage is up for renewal. Your lender has called you, and suggested they can handle your business, you've been a good customer. Why don't you just come in and sign some papers? So, you make an appointment, and you go in, without another thought.

Is this the right approach? Nope.

When your mortgage is due for renewal, it is an ideal time for you to shop around and really understand interest rates. It might be worth your while to move your mortgage to another lender- particularly if the competition is good and interest rates are lower elsewhere. While another company is competing for your business, they may also offer you other benefits you aren't getting now - including paying any fees associated with moving your mortgage.

Doesn't moving your mortgage mean a lot of hassle? Not really. But do your homework. First, check your current mortgage and understand if there are any fees associated with moving your mortgage. (This kind of fee is extremely common - and you should expect it.) Once you know there are some costs to you, you should be looking for a lender who pays those fees.

Second, shop around. Is your current lender offering you a really good rate? Perfect! You may not want to move. Just go ahead and renew. However, if you can save somewhere else, then you should likely move, especially if your mortgage is for a large amount or you still have many years on it. Why? The long term costs of your mortgage are the result of the interest you pay over the life of the loan. The more you save in interest in the early part of your mortgage (when the amount owing is still high) the less it will cost you over time. If your mortgage is for a very small amount, or you will be mortgage free in 5 years or less, and you are saving less than ? percent, you may not want to move your mortgage. The savings may not give you enough 'pay back'. Be sure you know how much the fees are to move it, and compare that to what you will be saving. If the fees are more than you save - stay put.

Third, are you getting the kinds of other options you want? Does your mortgage allow you to make lump sum payments whenever you want (or do you only have 1 day a year, on the anniversary)? The open ability to pay extra, from as little as $100 to 10 or 15 percent of the mortgage value, can make a huge difference in the long term costs to you. Every extra payment you make is money directly to the 'principal' of the loan. This means less loan that you are paying interest on!

Posted by TheBlogMachine.com at 2:15 PM EDT

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Mortgage Refinancing

For many people, refinancing their mortgage is another way of saying 'renewal'. Their bank or lender calls them up and says, "It's time to renew your mortgage." They have a short discussion on the phone, which results in the signing of new papers for another term, without too much thought. However, this isn't really refinancing.

Refinancing is generally something you do to get access to the equity in your property.

Refinancing is a necessity for some because they need some extra money for the house. They want to make use of some of the equity that has built up in their property. This means that they need to negotiate for a new mortgage - at a higher amount than they had before.

And then again, it could be that your interest rate on your mortgage is too high, and you want to refinance to get that rate down. If you negotiated a mortgage when your credit rating was not as good, and you've repaired your credit now through a good track record of payments, you should certainly refinance. In a volatile interest rate market where rates are dropping and you are locked in at a much higher rate, it can be to your advantage to pay those penalty clauses and get yourself a better interest rate.

Your best reason to refinance is to lower your interest rate and consolidate your debt. Of all the reasons to refinance, this is one where you are going to benefit without a doubt. If you are carrying a lot of credit card debt and are finding yourself in over your head, refinancing can get you out of the hole and in position to turn your financial situation around.

Regardless of the reason that you are looking at refinancing, you should weigh all the pros and cons carefully.

Always be sure that you are lowering your overall interest costs when you refinance. You should check this even when you want to refinance to get access to money to renovate. If you could buy your materials through a no interest deal with a home renovation store, you might not really benefit by refinancing now. Many of the large stores in home renovations have credit cards that will give you 6 months no interest. The trick is that you have to be willing to pay the purchase off in that time period, or pay the much-higher credit card interest rates.

In general, however, the "cheaper" the cost of borrowing, the better it is for you. If you take that credit card and find that you won't be able to pay it off before the no interest period is over, you should consider refinancing. It will save you a lot of money over any credit card debt.

Posted by TheBlogMachine.com at 7:55 AM EDT

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