We recently completed a marathon refinance session. This is the second (and hopefully last) go ‘round. Our decision to take the plunge wasn’t automatic. When considering to refi or not to refi consider the following:
- Cost of Refinancing – The cost will vary wildly between various banks and credit unions. Always check with your current lending institution. I’ve found each time that certain fees (i.e. PMI for less than 20% loan to value) are waived that would otherwise apply. That cost of refinancing can range from $0 (best option) to a percentage of your balance. Fees are sometimes negotiable. It doesn’t hurt to ask.
- Time Horizon – How long do you plan to stay put? Obviously no one has a crystal ball, but if your near term (1-2 years) plans call for trying to unload your property; a refi may not be worth the cost or effort.
- Interest Rate – A change in interest rate could save thousands! Our 2+% reduction will save $125,000 in interest over the life of the loan. We also reduced our loan term, but a savings is music to my ears. Test your options with any number of online mortgage calculators. I like bankrate.com.
- Loan Term – Anyone serious about eliminating debt and building wealth should consider reducing your loan term if your budget allows. In the last decade, 30 (and even 40) year mortgages were standard. People could afford more house with similar payments. A 15 year mortgage might come with a higher monthly payment, but it allows you to retire that debt faster, free up more income sooner for investing and debt free living, and brings a peace of mind that owning a foreclosure-proof piece of property can bring.
- Accelerated Payments – Sometimes the expense/effort of refinancing can be avoided facilitating forward progress toward foreclosure-proof-ness by adding to your monthly payments. This works well if you are disciplined – please be honest. (Here’s a hint: most of us are not!) In our case, an accelerated payment added twice the amount to our 15 year mortgage note – $400 for accelerated payments vs. $200 additional with a lower rate. So compare the scenarios and choose the best option.
Don’t assume that a refi can’t happen because your home is worth less than the mortgage. Contact your lending institution and inquire about the options available.