How to Refinance Your Home
There is so much information out on the Internet that when it comes to refinancing homes it can be not only tricky to find the truth, but stressful. If you’re trusting your financial future to a random article off the Internet you might be in for some trouble. That’s why we’ve reached out to experts to get their opinion and ask them what advice they would give their clients who are interested in refinancing a home!
Ditch the wives’ tales. The conventional wisdom that you should refinance only if you can save 2% or more on your rate has gone the way of the horse and buggy. The rate scale has been compressed for at least the last ten years. Many homeowners who purchased in the 1970s and ’80s saw rates in the double digits. So it made sense that you could go from 13% to 11% in the right environment. But now, a 2% spread is a far larger percentage of the whole — in other words, you’re going to be very disappointed if you’re presently at 4.5% and waiting for 2.5%. The likelihood of that happening is virtually non-existent. Assess savings on an individual basis. If it makes sense for you, that’s all that matters, and it might only be a half a percent difference.
Refi, but keep making your current payment. I think too many folks focus on monthly savings. But even if you can save $100 per month, you may be able to save really big in ways you’re not considering. I will often counsel a borrower to refinance but to continue making the payment he/she makes with the existing loan. In doing so, the additional principal payments will, over time, dramatically reduce the term interest paid and have them paying off the loan years early. All from a transparent means of forced savings. If you are comfortable making your payment now, refinance and have your money work harder for you.
The primary reasons why one would want to refinance is to save money. lower rates can save hundreds of dollars. People use the equity in their home for debt consolidation. Paying off credit cards, or car loans would be prudent, because the rate is much lower and tax deductible. The term on a mortgage is usually longer so that creates more cash flow for many consumers. Other clients refinance to lower their terms, or if they want to put money down to lower their rate.
Many times IT DOESN’T make sense to refinance. One has to speak to a competent loan officer to determine if the closing costs associated with the new loan are worth the proposed savings.
The number one piece of advice I give clients and promote in my book is forget about the monthly savings! People lose more money basing a go / no go decision on a payback analysis that features monthly savings than anything else. It’s easy to do, it’s math (so it’s trustworthy), and it can lead you to make a decision that will cost you tens of thousands of dollars.
There are a lot of neat little tricks one can use to shave some costs here and there, too, but the go / no go decision, and – if it is a go – the plan to manage the debt, make all other tricks pale in comparison.