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Refinancing Your Home




By Heath Copps

Refinancing is a great way to cut your monthly bills and save money over time, but before you obtain a new loan make sure the numbers add up.

What is Refinancing?
Refinancing (refi for short) is trading in your old high-interest loan for a new lower-interest loan. When interest rates drop, itÕs generally an indication that the economy is struggling and the business of selling mortgages has slowed. In these economic conditions, if your payment history and credit report are in good standing and you still pull enough income to afford your house, lenders will fight to give you loans at lower interest rates.

Does a Refi Make Sense? Evaluating Costs vs. Savings
DonÕt be lured by low interest rates without first doing a little math. Normally, a refi is going to cost you 1 point, which is 1% of the total amount of the loan. Plus, you may have to pay an assortment of other fees for a credit report, title search, title insurance, appraisal and recording a new mortgage lien. And, if you have less than perfect credit you may also be required to pay an application fee.

For a good idea of exactly how much itÕs going to cost to refinance, take the total amount of the new loan youÕre planning on applying for and plug it into a mortgage calculator < http://www.smartmoney.com/home/living/index.cfm?story=refin> with the new and improved interest rate. Then add your current property tax and homeownerÕs insurance payment (you can find these on your latest mortgage statement) to the principal and interest total on the calculator. This figure is your total monthly housing cost. Subtract your new total monthly cost from your current monthly cost to determine how much youÕll save.

Then, take the total cost of getting a refi loan and divide it by how much you save per month. The resulting number is how many months it will take before you recoup the cost of refinancing. For example, say you determined that the cost on a $150,000 refinance loan is $2,000, and that with the new interest rate, you save $125 each month. Dividing $2,000 by $125, you learn that it will take you 16 months to breakeven on the refinance. These estimates will not be exact, because amortization has not been factored in, but the ballpark figures are close enough to determine the viability of a refinance.

If youÕre planning on staying in your home longer than the number of months youÕve determined it will take to break even, then by all means do the refinance. Bottom line - you save money. However, if a move is in your near future, it does not make sense to pay the extra costs to get a new loan.

NOTE: For an even more accurate picture of how a refinance will affect your finances, make sure to ask your accountant how your taxes will be affected. Paying less interest each month means less tax write off.

When to Refinance
The perfect time to refinance is when interest rates fall. When this happens check with different lenders to see what interest rates they can offer you. Generally, if you can cut 2% off your current interest rate, a refinance is worth it.

For instance, on a $100,000 loan, if you can refinance from an 8% to a 6% loan, youÕll save over $40,000 in interest over the life of a 30-year loan. Plus, youÕll cut nearly $140 off your monthly payment. Definitely, a worthwhile endeavor if youÕre planning on staying put.

Other Reasons to Refinance
Other than to save out of pocket expense on a monthly basis, and saving a good deal of money over the life of the loan, there are several other reasons you may consider a refi.

Cashing out. If you have built up equity in your home, having paid down the principal over time, you may be able to borrow against it when you refinance. Many people take advantage of this to pay for significant life events, such as weddings, college tuition, a special vacation, or even home repair.

Debt consolidation. You may be able to bundle all of your debts (car loans, credit cards, second mortgages) into one easy payment at a lower interest rate, saving you money and time on your debt repayment.

Switch loan types. Trade your Adjustable Rate Mortgage (ARM) in for a fixed loan or vice versa. You may have received a great rate to take out an ARM when you bought the house, but rates went up and your interest rate followed suit. Now, rates are back down and youÕd like to lock in the lower rate instead of riding the ARM roller coaster. ThatÕs a great reason to refinance. Conversely, perhaps with a fixed rate loan youÕre stuck with a high rate. Switching to a very low interest rate APR may save you a great deal of money.

Faster equity accumulation. If you refinance at a lower interest rate, you can pay less each month or you can write a check for the same amount you were paying, effectively building up equity in your home much quicker. Just be sure to earmark the extra payment for principal only (not interest).

Where to Find a Great Refinance Loan
The best place to find great refinance rates is a lender that specializes in refi. With much practice, they know exactly where to find the best rates. Of course, donÕt forget your current lender. They may be able to waive some of the fees or find you a better loan because they already have an established relationship with you.

Other institutions that offer refinancing include commercial banks, savings & loans, mortgage bankers, mortgage brokers and credit unions. As always, itÕs best to shop around for the best deal. Not all lenders or loan products are alike.