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6 Things To Consider Before Refinancing

By: Steve Johnson

12/22/2008 - 32 Comments

Last Tuesday, the Federal Reserve lowered interest rates to 0.25 percent and within a few days, mortgage rates plunged to 37-year lows.

For more than a year, the declining housing market has been at the center of the US recession.  This move by the Federal Reserve is an attempt to encourage more people to purchase home, which will increase demand and stop prices from dropping.  It will also cause many to refinancing, which will reduce the number of foreclosures and therefore stop prices from dropping by reducing the supply of homes on the market. 

I have seen 30-year fixed rates as low as 4.50%, but those rates also come with a $6000 refinancing cost.   Before you refinance, ask yourself a few questions.

  • How long do you plan to stay in your house?
  • How soon will you be able to recoup you refinancing costs?
  • How likely are you to get laid-off within the next few years?
  • How many years to you have left on your existing mortgage?
  • Do you have other debts that you could pay off with when you refinance?
  • Do you own more than your house is worth?

The answer to these questions will effect whether you should refinance or not.  I think everyone should take a serious look at this opportunity, but don’t rush into it without giving it some practical analysis. 

Here are a six reasons why I wouldn’t refinance my home and why I’m not planning to.

  1. If you don’t plan on living in your home for at least the next 3-years, then it is unlikely that you will be able to recoup the costs. 
  2. If you cannot recoup the refinancing costs within the next 18-months, then I wouldn’t refinance because the risks of your house losing more value (putting you underwater) and the risk of losing your job (becoming unable to pay your mortgage because your refinancing costs consumed your cash reserves) are too great. 
  3. If you are likely to get laid-off within the next few years, then it may be more important to increase your savings then refinance your home.  It would really such to refinance today, only to lose your house two years later to foreclosure. 
  4. If you only have a 8-12 years left on your mortgage, then you interest rate is not as much of a factor, because reducing your interest rate will not likely change your payments by very much – which will increase the time to recoup your refinance costs.  If your goal is to pay off your mortgage as fast as you can, then you’re better off with your current loan. But, if your primary reason is to reduce your payments, then you could change to a 30-year loan – but your total interest costs over 30-years will be much higher than your existing 8-12 years left on your current mortgage.   (This is why I’m not planning to refinance)
  5. If you have other high interest debts like car loans or credit cards, then refinancing could provide you an opportunity to increase your mortgage loan and pay off these debts. That is of course if you have a positive equity in your home and your home appraises for a high enough value to allow you to do this.  Many people did this during the boom years, but how that housing prices have dropped 20% nationally, few people have any positive equity in their home.
  6. If you own more than your home is worth, then you are going to have to pay for the different in what you own verses you homes appraised value and you are also going to have to pay the minimum down payment because the banks won’t give 100% loans anymore.  In this case, you are probably better off calling your bank and negotiating with them before refinancing.

In Conclusion

For some people, this is probably the best time to refinance and I hope the strategy by the Federal Reserve succeeds in putting a bottom in the housing market.   The Fed also said that they are planning to leave the interest rates close to zero for an extended period of time.  That said, if you are considering refinancing your home, you don’t have to do it today.  So, take some time and talk it over with friends and family.  Call around and run the numbers and see how much a refinance could save you today and long-term.  Compare the results to your goals and consider how a refinance could help you can get out of debt faster and how it could keep you in debt longer.

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