6 questions to ask before you refinance
Refinancing your mortgage can be a quick way to save on payments, but it's not for everyone.
Refinancing your mortgage can be a great way to save money, but it's not a sure thing. Before you take the plunge, ask yourself these six questions to avoid making a major money mistake.
1. Do I have the time to spare?
This question is basic, but you shouldn't overlook it. If you're already very busy with work or other major obligations, it may be in your best interests to wait until you have more time to deal with the details of the loan. If you are too busy or stressed out, you might make a mistake, missing something important in the fine print or falling prey to a bad loan. Refinancing should be done with the same extreme care you put into getting your original mortgage — it's just as big a decision.
2. Will I break even or come out ahead?
Most people assume that refinancing will put them ahead; otherwise, they wouldn't do it. But how realistic is this assumption? Any number of situations could arise, from work relocation to family emergency, that could influence your financial situation and make your decision to refinance unprofitable. Unfortunately, it's not possible to predict with complete accuracy whether you will own the home long enough to come out ahead on a refinance, but you can make an educated guess. Since it is possible to lose money on a refinance, it's important to consider whether you can afford that risk.
Article continues below
3. Am I disciplined enough to resist rolling other debt into my mortgage?
It might sound like a good idea to pay off some of your other debts by refinancing them into your mortgage. Why owe money to multiple people and make multiple debt payments every month, when you could have just one debt and one major monthly payment, all at a low interest rate? Well, let's use an auto loan as an example. Auto loans often have higher rates than mortgage loans — depending on what market conditions were like when each loan was taken out, of course — but they also have fairly short terms. If you take that short-term loan and turn it into a 30-year loan, even at a lower interest rate, you're likely to end up paying more. You didn't think the bank was offering to consolidate your debt out of the kindness of its heart, did you? Banks are businesses. They're in it for the profit, and if they can stretch out a loan for you, they're often happy to do it because it allows them to collect more interest.
- MSN Money: Home-equity loans make quiet comeback
4. Am I likely to qualify for the rate I want?
The current interest rates for a refinance quoted on major financial websites and the evening news can only give you a general idea of what interest rate you might be able to get. The details of your specific situation, such as your credit score and the type of loan you want to refinance into, will affect the rates available to you. If you don't qualify for the lowest advertised rates, is it still worthwhile to refinance? Talk to a few lenders to see what kind of rate you can expect, but keep in mind that the unscrupulous ones will quote any rate to get your business. If you trust the person who handled your first mortgage, that's a good place to start your research.
5. Can I meet today's tighter lending standards?
If you took out your last mortgage before the housing bubble, when no-doc loans were commonplace, you may be stunned by the borrower requirements and documentation requirements to refinance in today's market. Many lenders will want you to have a high credit score and ask you to provide full documentation of your financial situation, such as recent pay stubs, bank account statements, tax returns and more.
6. Can I prevent going from a good loan to a bad loan?
If you're not savvy when it comes to money, contracts and salespeople — in this case, loan officers — or you just don't trust yourself to not make a mistake, refinancing might not be in your best interest. If you know you have a good loan, you may not want to roll the dice and see what you end up with when you refinance. And if you already have a bad loan, refinancing will be useless if you just end up in another bad loan. Also, there's always the risk of bait and switch — just like when you first bought your home, a lender may quote you one interest rate and set of fees on the day you decide to work with them and give you something entirely different when it's time to sign the paperwork.
- On our blog, 'Listed': Study: Banks' incompetence thwarted 800,000 loan mods
Refinancing can be a great way to save money. If you do it right, you can improve your short-term cash flow while also increasing your long-term net worth. But a bad refinance can put you in a situation where the only person benefiting is the loan officer. If your answer to any of the questions in this article is "no," you may be better off looking for simpler ways to decrease your expenses, such reviewing your insurance policies, cutting your grocery bill or looking for ways to lower other household bills.
Am I the only one that just noticed that this is a pretty old thread? I see posts from as far back as August 2011 and only as recent as January 14, 2012. Today is July 21, 2012. Only thing that is still applicable is that the banks are crooks, and if you don't really know what you are doing, stay with your original loan terms, or at least hire someone who is a mortgage professional that is ONLY looking out for YOUR best interests, and not the banks or their own. No matter what their services cost you, it will be the best money you ever spend, to assure that you don't get screwed over by the banks.
Anyone willing to do a little number crunching can find some nice savings by doing a beneficial refinance. I found a useful program in MS Works that could help in evaluating current and new loan costs vs savings. If you have MS Works look under financial worksheets and select standard loan analysis. This worksheet will help break down the amount paid in interest and principle of the lifetime of a loan. I spent a few hours going over the numbers and reviewing old mortgage payments and now have the potential to save thousands over the lifetime of the loan. A friend recently refinanced with PNC bank and had closing costs under $500 and he had no previous affiliation with the lending institution. It doesn't hurt to check with several banks before making any decisions.
The terms of the new loan and how long you have been in your current loan are huge factors in determining if the refinance will save you money. I have found that if you paid less than 5 years on your current loan, are planning on staying in this home for at least 10 years and the savings in interest is at least 2% then the refinance will save you money. Anything less than that and it will take some serious calculating to be sure that the loan is worth the change.
Mjrenn ~ has a valid point in that the amortization of the loan is important. The numbers used in the example are not realistic however and don’t forget that you’re not usually refinancing the entire original mortgage so the money you’ve paid towards principal has decreased the loan amount. Provided your equity is building on the property you will still have the advantage. Keep in mind that if you allow your property value to decline because you fail to keep up on repairs, all bets are off. One last bit of information ~ the example stated in mirenn's post suggesting a $2,000.00 payment would disperse $50 for principal and $1950 for interest is ridiculously inferred. A 7.05% on a $300K loan for 30 years sets payments @$2,005.99 with $243.49 being applied to principal and $1,762.50 towards interest. (not including escrow) I wanted to keep the payments around $2000 and the loan amount at 300K for my example. Mortgage rates are much lower than 7.05%. Of course the lower the rate, the more payment $$ are applied towards principal.
THE MOST IMPORTANT VARIABLE in every traditional mortgage is NOT RATE rather is that ammortization schedule. RATE is used to DISTRACT everyone from the real financial variable that stack the deck in favor of the banks...the ammortization schedule. Ask yourself this.....why would banks advertise new lower rates and encourage you to refinance? So you'd pay LESS to them? Give me a break. Here's why.....keep in mind that the average 30 year mortgage lasts something like 5 or 6 years...(due to selling the house or refinancing)....So you are going along with your 5 or 6 or 7% APR and are 4 years into a mortgage....your amortization schedule is completely FRONT LOADED with intereste payments. Example...your first mortgage payment say of $2,000 (just an example)......forget prop taxes....would be like $1950 of taxes and $50 towards the actual mortgage (principle)...now 4 years into it you are making a little headway and your schedule now takes say $1500 in interest and $500 goes towards the principle every month....so you refinance to a 4.5% rate...seems good right....Well not really because now you go right to the front of that schedule again...it is almost a scam the way it works with that schedule.....every loan has Rate and Term.....TERM is the more important variable by far bc the TERMS of the loan dictate that you pay using a schedule that STACKS the deck so the BANKS win big time..
We did all of that and locked in a good rate and were told it was okayed.
A BofA/Countrywide rep called and said we had to put in $9,000.00 more than the original terms.
It would take 2 years to make up that but we said okay.
So much for following the rules.
There are reasonable refinance people and their are con artists. All are regulated but the swifties usually try to get rich quick on the rate, points and closing costs. Watch the APR and calculate how long it takes for the difference in monthly payments to pay the closing costs--compare 30 yr. with 30 yr. and 15 yr with 15 yr.-not 30 yr with 15 yr. If less than one year, it is a good deal. If it takes two years for the payment savings to pay the cost, it is a marginal and possibly a bad deal. Always compare rates and closing costs with what your Credit Union would charge you for the same loan. Credit unions are on the high end for fees but some banks are much higher still. Too bad the Government bails out banks directly rather than giving the money to homeowners with the understanding the money had to be applied to the mortgage. That way, the homeowner is bailed out and so is the bank in one deliberate stroke.
If you do a little research you can really come out ahead. I had a 4.5% loan for 11 months. I called the same lender and refinanced for 3.75% putting the past year’s escrows back into the loan (that took the mortgage back to the original loan amount). I had to pay just over 2.5K in closing mostly because my property taxes were due. Because I went through the original lender there were minimal fees and in fact I received $2800 incentive from the bank. Got to skip two monthly payments (good timing) and got a refund of my previously paid escrows (from the original mortgage). Payments are down; got money in return. The process was easy because I have outstanding credit which enabled me to get good service originally (meaning I’m not in debt and have some money in the bank.) With all cost (including my time) considered I have already recouped (in one month) my expenses and now have the benefit of lower monthly payments. Do not let this article prevent you from making a good decision. It isn’t hard if you’re willing to read a little. Good luck!
I did a refin about two yrs ago. Mort was 6.25 refin at 4.25 for 15 yrs instead of the 30 with the 6.25. I also paid the closing cost rather then have them finance and pay interest on that part. My payments did go up by about 20 bucks a month but, I will save any where from 50k to 60k in interest. So now I will be paid off in about 12 yrs and months -v- 22 yrs and months and 50-60k in interest payments.
I did do the conventional way with a fixed 4.25, no playing around with payments what so ever. That's what nail most of the people who bought with 0 (Zero down) v- my 20% down and their exploding payments in 5 to 7 yrs.
I have the BEST way of saving money........
I took out my home loan almost 8 years ago at 8% and I'm almost done (May of 2012). I also started taking money from the other bills that I had paid off and started sending that money to them. I will then have NO MORTGAGE and all of the extra money I've been sending them will be MINE (over $1000.00 a month).
I will then have almost all of my "Fixed Income" money to myself and will no longer be in anyone's pocket except the taxman.
As for applying for a "Refi" Not On Your Nelly!!!!!!!!!!!!!!!!!!!! PFFFFFFFFF on them!!!!
If you want to know the true cost of the loan you look at APR. APR is not the same as the rate if there are any loan expenses. If the rate is 4%, the APR (annual percentage rate) may be 5 or 5.5%. APR is the cost of the loan on an annualized basis. One lender can offer a 4% loan at 5.7 APR, while another lender can offer a 4.5% loan at 5% APR. The first loan has a lower rate but a higher cost.
The only time rate and APR will be the same is when there are no loan costs. Every loan has considerable cost- many service providers must work on a loan and they earn money for their services. The lender can pay some or all of the costs. If the rate is the same as APR it is because the lender is paying all the costs. The lender will recover the costs by charging you a higher rate.
To determine which loan is more expensive you look at APR, not rate. Higher rate can be better for you. You must look at all aspects of the transaction and decide what you want- lower rate? lower costs? lower cash out of pocket? lower long term interest expense? You get to choose this, not the lender. Any lender can structure your loan transaction any way YOU choose. So don't "shop for lowest rate", shop for a wise, honest mortgage professional to teach you this. Because you don't know what you don't know. A good counselor will make you aware of all those things you should consider. It's not all about "rate". It's about how much money you spend on interest.
Most of the information in this article is inaccurate and foolish. 1) Every borrower must sign papers acknowledging the loan expenses and the rate applied for. Federal law doesn't allow the loan to close at higher than the previously disclosed rate. If the expenses are higher than estimated, the lender must pay them unless the reason for the increased cost is related to the borrower's circumstances, in which case the borrower is given a new estimate and may choose not to close the loan.
2) Federal law gives borrower 3 days to cancel the loan contract after it is signed. Borrower has plenty of time to prevent any "bait and switch".
3) "Too busy" to save tens of thousands of dollars? That's foolishness. Most refinances recover the loan expenses in 2 years or less, and the expenses are a non-cash investment. Any wise borrower will find 4-8 hours to invest in saving tens of thousands of dollars. Many refinances save borrowers $3000 - $5000 per year in interest expense. What borrower is "too busy" to find the time to save this kind of money? And what writer of advice would tell people to "wait until you are not so busy"? That's foolishness.
4) Lenders do not make refinance loans that cost...only loans that pay. Federal law requires a proof of significant benefit to borrower in refinancing. No loan can close without that benefit. These laws are highly restrictive and heavily enforced. These days no one can "refinance into a bad loan".