5 Questions to Ask Yourself Before
Refinancing Your Home
Let’s face it, if you’re not careful refinancing your current mortgage can be an expensive transaction. While refinancing your mortgage can be used to put yourself and your family in a much better financial position, you need to consider a few things in order to maximize your savings.
Although it may seem like it, refinancing is not free. Here are five questions you need to ask yourself before you refinance your home:
Why are you refinancing?
In order to realize a benefit when refinancing your home, you need to be clear on what you expect to get out of it. Whether it’s paying off debt, converting your adjustable rate to a fixed rate, or shortening the term of your loan, the point of refinancing is to “benefit” (putting yourself in a better financial position or accomplishing a long term financial goal.). Keep in mind that refinancing to get away from your current lender is not—and never will be—a compelling reason to refinance.
What will you do with the “extra money” each month?
Paying off credit cards and other high interest debt is a smart move. When you do this, your monthly expenses will go down and you will have “extra money.” The problem with “extra money” is that many of us are tempted to spend it instead of save it and quickly wind up with the same level of debt we refinanced. Before you refinance and pay off those debts, create a plan for the extra cash you will have each month. This will prevent you from accumulating new debt on top of the old debt you just refinanced into your mortgage.
How long do you plan to live in your current home?
If you plan to continue living in your home for al least 3-5 years, refinancing is going to make sense. Less than 3 to 5 years and you need to weigh the costs of the refinance versus the savings.
How will you pay for the cost of refinancing?
In most cases, lenders will roll the costs of a refinance into your new loan. This practice is customary throughout the industry. However, the costs of refinancing including points and fees will chip away at your equity. If the costs you are rolling into your new loan exceed the breakeven point for the length of time you plan to stay in your home, then refinancing is going to cost you more than it saves you.
What is your broker getting out of this?
Be careful! Some mortgage companies encourage loan officers to “load up” the loan. This means they are encouraged to charge as much as possible in fees to max out the loan. When loan officers and lenders do this they are sometimes charging thousands of dollars more than the actual cost of the loan. They do this because it enables them to make more money which, reduces the equity you have in your home and decreases the amount of money you would have saved.
As a general rule, for every thousand dollars financed in fees adds an extra $7.00 per month to your house payment. Seven dollars a month may not sound like much but $5000 in fees can wind up costing you $37,070 over 30 years.
While refinancing your home can be a very timely and wise financial
move, you really need to have a plan for that “extra money,”
understand the debt you are about to create and make sure you
are not being overcharged for services that are not being provided.
Better yet, just call me (757.599.1810 x225) and I will be happy
to walk you through the process personally.
