MORTGAGE MATTERS

IS REFINANCING YOUR HOME A SLAM DUNK FOR YOU?

BY SYDNI ELLIS

Any homeowner with an email account probably spent the better part of spring receiving a flood of offers to refinance their house. With mortgage rates super low, the temptation to lower the monthly payment or reduce the term of the loan can be difficult to resist. There are, however, some things a homeowner should consider before leaping into the refinancing pool and all that paperwork to review, initial, and sign. For example, refinancing may bring you instant gratification because your monthly payment is lower, but it could cost you more in the long run. How? Well, let’s say you have a 30-year mortgage you have been paying for five years. Refinancing with a lower rate will indeed lower your payment, but it also resets the clock if you choose another 30-year term. So, those five years of mostly interest payments start all over again. You may also want to avoid refinancing if you aren’t in your “forever” home and planning to move in a year or two. These scenarios and others are why homeowners should do their homework before deciding to refinance. The first thing to do is shop for the best interest rate. All lenders are not the same. In addition to rates being offered, what other enticements are there? No closing costs, perhaps? That might make a lender with a rate that is a fraction higher more attractive because of reduced or eliminated fees associated with refinancing. Remember, refinancing essentially means you are buying your house again. Know your budget. An ideal scenario may be refinancing for a lower interest rate and trading a 30-year mortgage for a 15-year mortgage. That means you will own your home sooner and pay less interest over time. The question is whether your monthly income and expenses can absorb the new monthly payment? You don’t want to make yourself house poor. Refinancing is also a good idea if you have an adjustable-rate mortgage (ARM). This type of mortgage usually gives homeowners a few years of a low fixed interest rate, then balloons considerably, which can make it

difficult to make your monthly payments. In the Great Recession of 2008, many homeowners with ARMs who lost income because of the downturn in the economy faced foreclosure when interest rates rose. If you want to avoid that inevitable rate increase in an ARM, refinancing for a fixed rate makes sense. Another reason for refinancing is to roll a second mortgage or highinterest equity loan into your first mortgage at the refi rate and save yourself a bushel of money. Again, make sure the new monthly payment fits your budget. Take into account your job security before refinancing or your spouse or partner’s job security if both salaries are needed to pay the bills. Refinancing is also an option if you are re-investing in your home. For example, are you remodeling your home or updating the kitchen or master bath? Putting your equity back into your house may increase its value or at least make it sell faster. Beware, however, of refinancing where you are using the equity in your home to buy a boat, a car, or take an expensive vacation. People do this more often than you may think, but it can come back to bite them. Remember we said refinancing is like buying your house again. That means you will face fees such as an appraisal and closing costs. You may have the option of rolling these fees into the new loan or paying them upfront. Before you contact your lender, research rates online and use a mortgage calculator to determine how much a new mortgage will cost per month. It is important to be well informed because your home will probably be the biggest single investment in your life.