telemarketers calling you during your dinner hour, with billboards on
freeways taunting low rates, and with TV and sports celebrities pitching
lower payments; you might be asking yourself - is refinancing right for me?
Before you plunge into a
refinance, ask yourself these questions:
Is my payment going to be lowered by a worthwhile amount
What will be my total closing costs?
After paying points (no
points is also an option), after paying processing fee, title insurance,
escrow - the stuff adds up. Take that total cost and divide by the savings
you'd get by refinancing. For example, if the total cost was $3600 and the
reduction in your monthly house payment was $150 per month, it would take
only 2 years (3600 divided by $150 = 24 months) to recoup the cost. Beyond
the second year, you'll be saving plenty. Conclusion? If you plan on selling
within 2 years, using this example, it might not be worthwhile. UNLESS you
may opt for a no points loan whereby you encounter little cost. Or consider
applying for a no points and no cost loan, whereby you pay nothing in costs.
Recouping your closing costs with no points will take, using the example
above, much less than two years. Using the no points and no cost option will
cost you nothing. Then, all you have to determine is whether the new rate is
lower than your present rate. If yes, jump in, take a number, stand in line,
Do I have a pre-payment penalty?
Your present lender may have
imposed one. Some lenders penalize you for paying the loan early (typically,
in the first 3 years). If you're in that boat, you may want to wait until
the pre-payment penalty term is up. Unless of course, the new lower rate,
even when accounting for the pre-payment penalty and the closing costs, is
still far lower than your present payment.
Do I have an Adjustable mortgage?
You took out one of these
because you weren't planning on staying long in your home, but you did. Or,
years ago, the adjustable mortgage, with its initial lower payment, got you
approved a little easier. However, now the index (the price of money your
lender buys at wholesale) plus the margin (the profit the lender adds to the
index to sell to you at retail) has now come to haunt you. In other words,
your adjustable mortgage payment has become too expensive and unpredictable.
Refinancing into a fixed rate may be the right choice for you.
Do I have a balloon coming up?
A few years ago, you took out
a 5-year or a 7-year loan that's become due. In other words, your lender
wants his money back. Now! To avoid any last minute stress, and being
pressed against the wall, shop for a new loan at least three months before
the lender comes knocking.
Can you use some extra CASH?
That four-letter word we
can't seem to get enough of. Just when you thought you took out the last
home loan in your lifetime, you find that you need a new kitchen, a new car,
and your kids are reminding you of the college fund you had promised them.
You could tap into your credit cards, borrow against your 401K, or take out
a 2nd on your home. However, if you still have equity, refinancing the old
loan with the new cash, all rolled into one, is the least costly solution.