There are countless articles giving advice to homeowners
about refinancing. But we thought it would be a good idea to recount
conversations we’ve had that homeowners have related to us what they’ve been told
in the past about refinancing. Here are some a few of those we’d like to share.
Rates must be 2.0%
lower than what you have now before it makes sense to refinance. Okay, this
is easily the most common as well as pervasive. You’ll still see this on various
websites but it’s simply not true. Following such a statement can cost
homeowners thousands of dollars. Instead, refinance to a lower rate and compare
the monthly savings with the closing costs involved. If you can save enough to
recover your closing costs in a couple of years, it’s probably a good idea to
refinance. If it takes several years, it’s probably not.
Get the lowest rate
you can by paying discount points. Discount points, or “points,” are a form
of prepaid interest and lowers the rate on a loan program. Typically, one point
will drop a rate on a 30 year loan by about 0.25%. On a $300,000 loan, that’s
$3,000. A 0.25% reduction on a $300,000 note is about $42. If you divide $3,000
you paid by the monthly difference, that’s nearly six years. Not worth it.
Don’t pay points when refinancing.
Refinance your loan
so you can pull out cash to (fix the roof, build a deck, take a vacation). Not
a good idea. Pulling out cash with a refinance should be an afterthought. If a
refinance makes sense due to a lower rate or changing from an adjustable rate
to a fixed, then pulling out some cash may not be a bad idea. But there are
closing costs involved and if all you want is money to fix the roof, consider
an equity loan instead, don’t refinance the entire mortgage just to pull out
Pay attention to the
rate, forget the term. While it’s certainly important to find out what
rates are doing, even though rates might be lower if you refinance from one 30
year loan into another and you’re five or ten years into your current mortgage,
you’re stretching your loan out another full 30 years when you’ve paid your
mortgage down to 25 or20 years left.