Considering Refinancing Your Home? What You Should Know.

If you are like me you have been inundated with calls and mailings inquiring if you have an adjustable rate or interest only product.  Well that got me thinking, “Should I consider Refinancing now?” So for all of you scratching your heads right now. 

Here may be some sound advice to consider.

School of thought: Refinancing your mortgage can lower your payment by reducing your interest rate. Typically homeowners have refinanced their homes to consolidate debts, or pay for another a large purchase.  All are valid reasons to refinance. However, before you refinance, think it through. The following are some things to consider before signing on the dotted line, especially to a longer and higher mortgage.

The first reason to consider a fixed rate mortgage is if you have an Adjustable Rate Mortgage (ARM), and your rate is about to adjust. The prime interest rate is heading upward with no sign of the Fed stopping the climb in interest rates to fight inflation. However, what is puzzling is that the fixed rate mortgage rates are not following as rapidly in this upward spiral. As most ARMs are tied to the Prime, your ARM is probably already several points above the fixed mortgage rate.  Therefore, it may benefit you to lock in at today’s lower rate even if you don’t need the extra cash for other expenses.  Any refinancing charges will be regained shortly (five years or less) and in the long term you will continue save interest costs.  Any saving of course depends on how long there is to on your present mortgage and for how long the term of your refinancing.   We are still in a relatively low interest rate era and rates are likely only to continue to rise in the future.

Additionally, please note that the difference between your current rate and today’s fixed mortgage interest rate should be at least two or more points.  Anything less will not save you enough to make a simple
refinancing of the remaining principal a worthwhile transaction.  If you are refinancing to pay off other debts this criteria is undoubtedly met. Credit cards are ranging as high as 29%.  Store and other retail cards are no better. Refinancing is a good way to consolidate these high minimum payments into one, but remember your total debt now is secured by your home.  Bankruptcy is no longer a viable option.

Lastly, a large expenditure is a common reason for refinancing. The two most common are college tuition (Start those 529 programs earlier!) and medical expenses. With both costs going up faster than the average inflation rate even the best of planners has a hard time fully saving for these expenses.  For example, I have three kids in college.  Even with the HOPE scholarship, partial athletic scholarships and grants, we have spent as much as $30,000 in one year just for educational costs. 

Another use of refinancing is for major repairs to the home. Necessary repairs or cosmetic, both add value to the home and are worth refinancing for the future. Only you can decide whether refinancing your mortgage is good for you and your family. Does refinancing meet your goals, both short and long term. Age, prospective earning ability, kids educational needs, all impact long term planning. Down the road, will a longer refinancing term help or hinder you. Short term gains may not be worth the long term cost. 

The other side of course is you have to get through today to have a tomorrow. Refinancing is a valuable tool for regaining control of your short term debt. Talk with your lender and anyone you know that has refinanced. Use their knowledge combined with your goals to make an informed decision.