Should You Refinance Your Home Loan?

Should you refinance your home loan, pay off your home or buy another? Should be the first question you and your spouse ask yourselves before you decide to refinance your existing home loan.  

Recent reports show that some homeowners are borrowing to the constant enticement of lower home loan rates. And, without an analysis, find that they are backing themselves into a corner of more years and more costs on their loans, including more escrow cost and higher points. The savings they “thought” they were getting on a home refinance, turned out to be huge loss.

After you purchase a home, within a few months most new homeowners will get a barrage of snail mail suggesting you refinance your nearly new home.

The reason why you will be encouraged to refinance many times after the purchase, is because of profits for mortgage companies. Just remember, your home is not an ATM machine, it is best to ignore those offers for several reasons.

When you refinance a mortgage, companies collect a whole list of payments from your refinance, as with your original loan. Refinances wildly benefit the mortgage company but can hurt you badly. In fact, the people who do not get this memo may end up purchasing their own home 3-4 times during their lifetime when refinancing.

It is Not Wise to Refinance If:

-Your purchase is new ( less than 5 years old)

-There have been years of payments on your home, the focus – pay it off

-You are not going to save enough money to make a difference 

-Your home has been refinanced before

-The difference in the interest rates are small

-You will add another round of escrow cost

-You will get higher points to offset the so-called lower interest

-You are going to add years to your existing loan, losing the years you have paid

It Is Wise to Focus on Paying off Your Existing Loan:

-So you can focus like a laser beam and live mortgage free with a paid off home.

-If you continue to have a payment after several years, your payment will go down in regard to inflation.

-There are many tricks in refinance loans, because of this you can make big mistakes and increase your chances of lost.

-If the difference of total money saved and new interest rates are too small.

-When you don’t have the expertise and cannot do research to understand the loan process first.

A True Story About a Refinance Loan That Worked

I counseled a woman and her husband, who wanted to know if they should refinance their home, due to a decrease in her husband’s salary.

Here is The Analysis We Did:

1. We obtained her original loan documents and discovered her original and current loan was 33 years. They did not know this; they were told it was a 30-year loan. And because it was stated in months, they did not bother to calculate it.

At the time of the analysis they had 23 years left on her original loan.
With a new 15-year loan, she will shave 8 years off her original number of loan years. This includes the years from the remaining:
23 years (original loan) – 15 years (the new loan) = 8 less years to pay a mortagage in total, with the new loan.

2. They original loan interest was 6.7%. The interest rate on the new loan was 3.8% for a 15-year loan.

So, now they has 2 out of 3 major factors that will decrease the cost of their loan. The cost will decrease by both significant interest rate and number of years. Because of this she will not lose money in the refinance but will instead save money, lots of money.

3. Their payment will go from $3400, Principle+interest+taxes+insurance, to $2400. They will pay $1000 dollars less a month in payments. Coupled with the decrease in years, this is a real winner and takes a financial burden off the family.

Why Did the Above Mortgage Example Work?

The above 3 facts are called being in the right place at the right time.  It was  right because the low interest rates intersected with the savings from years.

They saw the savings and went with the new loan. Also, 5 years later, she had enough money after their finances improved, to pay off their new loan. Now, they live loan free and shaved 10 years off their mortgage.

This is one of a few cases I analyzed where it made sense and saved money to refinance. In most other cases, the refinance costs, coupled with years lost, do not make a new loan cost effective. Usually, the hidden costs are huge.

Considering the continuing low-interest rates on home loans, is it time for you to consider purchasing a home? — Or refinancing your existing home? Some homeowners are said to be refinancing their existing loan over and over.

If you are in the market for a new home, one of the best times to purchase a primary mortgage is when interest rates are low. Also, you need to find a reasonably priced home. But as far as refinancing, in my opinion, I do not feel that many of the constantly refinancing homeowners understand all the facts (and high cost) surrounding home refinancing. 

A one-time refinance is appropriate if you have done your homework and analysis, before you contact a mortgage broker. Then you know that a refinanced loan will be a benefit to you.

If you do not correctly answer the question, “How does refinancing work?” before deciding to refinance, you could get yourself and your home loan security at risk. Know for absolutely,  if you should refinance your home loan. 

Refinancing an Existing 30-year Loan

1. Each time you refinance to a new 30-year loan, you can go over your 30-year period to 40 years, 50 years and sometimes 60. If a homeowner does this every 5 year for 20 years, then at the end of 20 years you will have 30 years left to pay on your mortgage. Instead of 10 years if you did not refinance your original loan.

The extra years of interest and principle will substantially increase the amount of money you pay on your mortgage over time. And this will increase the actual cost of your home.

The Solution: 

-Calculate how many years you have already paid on your home loan.

-Look at the number of years on your new prospective loan

-Compare the interest rate of your old loan to your new loan

-Find out the total cost that will be charged to you for the loan, by the Mortgage Broker

-If you have a 30-year loan with 15 years left to pay. Then try for a 10-year loan if the interest rate is very low. There should be a significant difference between your existing interest rate and the new interest.

-Make sure every loan you get has no pre-payment penalties. Also, pay extra to principle each month to make sure you don’t go over the 30-year mark. Paying off any mortgage loan early can save thousands of dollars.

The Purpose:  

The issue becomes, “Why are you getting the refinanced mortgage in the first place?” Are you desperate for money to use for medical purposes, college, or some other dire emergency?

Or, are you looking to save money on your overall cost and either put the extra savings into a general savings account, retirement? Perhaps you want to retire earlier with no mortgage, pay down other bills, or lower your existing payments due to financial stress? And Does refinancing your home work or hurt you?

These are questions you must answer and make your intentions crystal clear to yourself and your spouse before you decide to refinance.

How Much Will it Cost to Refinance Your Home Loan?

It will cost you a hefty sum of money each time you refinance your existing home loan or purchase one for a new home. And even the so-called no-cost loans will cost you. The purchase price of a new loan is either 2%-4% of the new loan. In the case of the no-cost loans; the fees are added into your loan as a higher interest rate on monthly payments.

You will, therefore, pay for the cost included in your monthly payments. It can take as long as four to six years to pay off the cost of your home refinance, so plan to stay put for a while if you choose to refinance.

Understand the Secrets to Buying a Great Home, Before You Start >

Home Loan Resources for Primary and Refinance Loans

There are several resources to help you make a wise decision when it comes to choosing a loan for a new home. Understand how detrimental repeatedly refinancing your existing home can be. Refinancing your home should be a rare consideration and carefully calculated decision before you visit a mortgage company.

Credit unions and your local banks offer the best solutions for a mortgage. If you do not have optimal credit and money saved in a bank or credit union then carefully select a mortgage company.

The U.S. Department of Housing and Urban Development offers numerous resources on its Web site, www.hud.gov, for homebuyers. It publishes an eight-page booklet, “Looking for the Best Mortgage,” which offers advice on finding the best deal. General tips include:

1. Contact several mortgage lendersand brokers for information.

Check hsh.com to see what the average mortgage rates are now.

3. If you have a good relationship with your local bank, start with them. Especially if you have a substantial saving or checking account with them. The mortgage division is usually a separate business in your bank, but a relationship with the bank will make getting a mortgage easier.

4. Obtain all cost information, including interest rates, points, fees, down payment requirements and private mortgage insurance.

5. Negotiate your mortgage where possible. Mortgage deals vary from day-to-day. Once you find a deal you like, lock it in.

6. Federal law prohibits discrimination in mortgage lending, know your rights.

7. Understand your credit. If it’s not good, finding a loan could be difficult. To obtain a copy of your credit report, contact free credit report .
You should know your credit score and examine your credit report before you shop for a refinance.

Contact Me For a Free Personal Finance Consultation in Home Buying>

Sometimes credit reports have mistakes on them and they can be taken off by contacting your credit reporting agency in writing, before you shop for a loan.

The primary goal for you is to make sure you answer the question thoroughly, “Does refinancing your home work?”.  know should you refinance your home or buy a new one.

The More You Know, The More You Grow – Your Finances

MsFinancialSavvy, Lois Center-Shabazz

Lois Center-Shabazz| Money Strategist | Course Delta Agency

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