The rapid changes in our economy have created a number of difficulties, but the reductions in the mortgage interest rates for our home mortgage may create a positive economic opportunity for many of us if we go about it in a thoughtful way.
How do you decide if it is time to try to refinance your mortgage? Here are some of the key questions to ask.
What is the difference between your present mortgage interest rate and the new rate you may be able to obtain? There is no set rule on this, because it depends on a lot of factors. But a good rule of thumb is that your new rate should be at least 0.75 percent to 1 percent lower than your present rate. The larger the amount of your mortgage, the less the difference it may have to be to effect significant savings.
You may have different objectives, in addition to the rate reduction, that serve as valid financial incentives to refinance your mortgage. What are some of the main ones?
□ Gaining cash for a needed home-improvement project, or a significant expense, such as tuition for college or graduate school for your children.
□ Consolidation of your present debt. Many people have significant credit-card balances with interest rates that are 18 percent to 23 percent, compared to a mortgage interest rate of 5 percent to 6 percent. And mortgage interest often has tax advantages as well. (Consult your tax adviser.) You also may have a second mortgage, or equity line, that has a higher interest rate than the new rate you might be able to get on a new, larger first mortgage that combines the balances of your first and second mortgages. A good rule of thumb is to look at what the overall monthly payment is with your present payment requirements compared to what a consolidated payment may be. Also, be mindful that low monthly payments on a credit card that would stretch the payback period of your balance over a several- year period are never a good thing. Whatever your interest rate, the more quickly you can reduce your debt generally is better, long term.
□ Reduce the length of your mortgage. If you can reduce your mortgage from a 30-year term to a 15- or 20-year term, you will, over the life of your loan, save a significant amount of money. That is even when your new monthly payment, despite a lower interest rate, is higher than what you now have.
If you can handle the higher payment, it is generally a sound financial decision.
How much will your closing costs be? Lenders have standard charges for any loan, whether it is your original home purchase or a refinance. All of those costs have to be taken into account.
A general rule of thumb is that it should take you no more than three years to break even on your closing costs. For example, if your closing costs for your new loan are $3,600, your monthly payment on your new loan should be about $100 a month less.
How long will you be in the home? If you are not going to be in your home for at least three to five years, you are not going to be able to recapture your closing costs.
One especially cautionary note: If you have large credit-card balances that you are paying off with a new, debt-consolidating mortgage, you need to monitor very carefully your credit-card spending going forward. You would be wise to pay your new credit-card balances in full from here on in to avoid the same problem down the road.
■ Mike Wells is the senior partner of Wells Jenkins Lucas & Jenkins law firm in Winston-Salem.
Email
Facebook
Google
Twitter
Favorites
More
Advertisement