VIEWS: 42 PAGES: 5 CATEGORY: Financial Planning & Retirement POSTED ON: 10/16/2010
You might think that deciding to refinance a mortgage requires only a quick comparison of loan interest rates. Unfortunately, that’s not really true. Refinancing is trickier than that! Fortunately, three useful rules of thumb can often help you make sense of refinancing opportunities.
Three Rules of Thumb for Mortgage Refinancing by: Stephen L. Nelson, CPA You might think that deciding to refinance a mortgage requires only a quick comparison of loan interest rates. Unfortunately, that’s not really true. Refinancing is trickier than that! Fortunately, three useful rules of thumb can often help you make sense of refinancing opportunities. Rule 1: Don’t Ignore Total Interest Costs You really want to use refinancing as a way to reduce the total interest cost you pay. While that sounds simple in principle, it is sometimes difficult to do. The interest costs you pay are a function of the interest rate, the loan balance, and the loan term period. When people refinance, they tend to focus solely on the loan interest rate. But they often don’t pay as much attention to the loan term or the loan balance. When you use refinancing—even refinancing at a lower interest rate—to increase your borrowing or to extend the time over which you borrow, you often aren’t saving money. Rule 2: Trade Expensive Money for Cheap Money For refinancing to make economic sense, however, you do need to swap higher interest rate debt for lower interest rate debt. This calculation, however, is tricky. To make an apples-to-apples comparison, you must look at the annual percentage rate that will be charged on your new loan—this is the best measure of the new loan’s interest rate cost—and then compare this to the loan interest rate on your old loan. You don’t want to compare interest rates on the two loans nor do you want to compare annual percentage rates on the two loans. Again, just to make this perfectly clear: You want to compare the loan interest rate on the old loan to the annual percentage rate on the new loan. When the annual percentage rate on the new loan is lower than the loan interest rate on the old loan, then you are truly paying a lower interest rate. Comparing annual percentage rates with loan interest rates seems confusing at first. But note that you would pay only interest on your old or current loan, so that’s all you need to look at in terms of its costs. With a new loan, however, you would pay both interest and any origination or closing cost fees. The annual percentage rate wraps the interest rate charges and setup charges, origination charges, and closing cost fees into one interest rate-like number. Rule 3: Don’t Lengthen the Repayment Period Be careful that you don’t extend the length of time you borrow by continually refinancing. For example, one common rule of thumb states that every time interest rates drop by two percentage points, you should refinance your mortgage. However, there have been times in recent history when following this rule would have had you refinancing your mortgage every few years. This could mean that you would never get your mortgage paid off. If you refinanced every few years, you would suddenly find yourself still 30 years away from having your mortgage paid. Mortgage Tips from Me to You by: Seymore Hennigan At some point in your adult life, you are likely to purchase a house of your own. Whether you are sick of renting, or you have decided to settle down and start a family, purchasing your first home can be an exhilarating and nerve-wracking adventure. In researching the best practices for new home buying, we decided to give you three of the most important tips. Our first suggestion is to save, save, and save some more. The idea behind this is to enable you to make the largest initial down payment on your new home as possible. We know how difficult it can be to save, but this could save you thousands of dollars in the long run. Wouldn’t it be great to be able to save thousands of dollars to use for your own ends, instead of paying it to some faceless bank in interest payments? Secondly, try to educate yourself about the types of financing available. Shop around, or speak with a mortgage broker who can act on your behalf. In my opinion, your best bet is to lock into a fixed rate mortgage. A new home is very expensive, and you are likely to be short of cash for the first couple years. A fixed rate mortgage will provide you with the peace of mind that comes with knowing exactly what your mortgage payments will be each month. Remember, you can always renegotiate the terms of your mortgage at a later date. Ensure you have the stability you need to get off on the right start. Lastly, be sure you have a proper home inspection done before you complete the transaction. If you feel the price of the house you are about to purchase is too good to pass up, it is probably is too good to be true. It is worth taking the time to ensure things are done properly. If you have to move fast for fear of missing out, make an offer, but ensure that your offer is conditional on upon a successful home inspection. Far too many first time home buyers have gone broke fixing repairs that should have taken care of by the previous owner. And, please, do yourself a favor and find an independent home inspector that doesn’t have a relationship with the real estate agent! Mortgage Refinance: 4 Ways To Know Its Time to Refinance Your House. by: Nathan Dawson You may want to refinance your home for several reasons. 1) Mortgage Rates might be lower now. The biggest reason that people refinance their mortgages is to save money. No matter what has happened to you, there is always a good reason to start saving money. A lower rate on your mortgage can help you stretch out the payments so that every month you are paying less to live in your house than the previous month. When interest rates are low and you had previously locked your mortgage into a higher price, it might be a good idea to shop your rate around to see how low you can get it. The early 2000's have been an environment of very low mortgage rates which make it a good idea to shop around to see if you can refinance your mortgage. 2) You need money and need to stretch out your payments. Maybe you've recently filed for bankruptcy and therefore need more money to get back on your feet. Maybe you've switched jobs and therefore need to refinance your mortgage in order to make your monthly payments lower. No matter what people say, it's always a good idea to have more money in your pocket than less, isn't it? Refinancing your mortgage might be a good idea in this situation. 3) There may be better deals out there than you think there are. Finding a new mortgage company or bank to refinance your mortgage might be a good idea just to kick the tires of the industry and see if you could get a better deal. If you've been spending a lot of money and paying off the balances on your credit card on a monthly basis there is a significant chance that your credit score has increase recently. An overall better credit score is better for everyone including your lenders. If a new lender sees that your credit score has increased recently, she might be in a much better position to give you a better deal on your mortgage than you think. She could refinance your mortgage by shopping the deal around at more banks and finding the best one for you. Shop your refinancing around, it can't hurt. 4) Mortgage refinancing as a sound business decision. If you own a small business of any sort and need a capital infusion, then investigating mortgage refinancing might be a very smart thing to do. If your business is truly small and you run it out of your house, then the line between your personal and business expenses might be thinner than you are reasonably comfortable with. Clearing up a little extra capital, through refinancing your home, every month might be the difference between investing in some new small equipment and not investing. Everything that is an expense should be lowered if possible. Refinancing a mortgage might be a fantastic idea to increase capital reserves and to plan for future investments. Many business owners who work out of their homes constantly try to decrease their monthly payments so that when it comes time to pay their business bills, they have a little extra capital. Always check with a CPA or attorney to determine what is deductible and what isn't. But, more money is more money, even if you are lending it from yourself to your business
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