Personal
Finance Best Practices
Is Refinancing Your
Mortgage a Viable Option?
By: Cathy A. Norris CFP®, CLTC, CRPC®, Financial
Advisor
Mortgage rates have dropped
to historically low levels in recent months. If you
already have a mortgage and wonder if you could benefit
by refinancing your home loan, it may be worth a closer
look. But refinancing is a complex process, one that can
be costly, as well. You want to be sure that refinancing
is right for your circumstances.
The first consideration is
whether the terms of a refinanced mortgage are
significantly more favorable to you than those on your
existing loan. This might be obvious if you are working
with an adjustable rate mortgage where the rate has
risen significantly from the time the mortgage
originated. Even the rate on a fixed rate loans
(typically 15-year or 30-year loans) might be notably
higher than what you could find in the market today.
Refinancing is a more
critical consideration if you’re having difficulty
making payments on your current loan and face the
potential of a home foreclosure. In that instance, you
should actively seek to refinance your mortgage with a
new mortgage provider or talk to your current lender
about restructuring your loan.
The big question – is it
worthwhile?
Refinancing a mortgage usually comes down to one simple
question – is it financially beneficial for you to do
so? This requires a few pieces of information, and you
must weigh both the immediate and long-term benefits:
1. What is the new rate that is offered?
You will want to shop around and see what different
interest rates and loan terms lenders have to offer.
Once you have found a rate that looks attractive,
calculate how much you would save in your monthly
payment by refinancing at the lower rate. You can find
mortgage calculators and refinancing calculators on the
Internet, so you can compare your current house payment
(principal and interest) to what the payment would be if
you refinanced.
2. What are the costs of refinancing?
There are costs associated with a typical mortgage
refinancing. These can include:
• Application fee – to cover
the initial costs of processing your application
• Title search and title insurance – a legal requirement
to verify ownership of the property
• Appraisal fees – to pay for a new appraisal of the
property’s value
• Loan origination fees – these typically run about 1
percent or more of the total value of the loan.
Costs can run up to several
thousand dollars. In some cases, lenders may waive
certain fees, but often when this occurs, the interest
rate on the loan is higher.
3. How long will you be in the house?
After you determine how much you would save on a monthly
payment and how much it will cost you to refinance your
mortgage, you will be able to calculate how many months
and years it will take for you to come out ahead by
refinancing your mortgage. For example, if the monthly
payment declines by $100 and the cost of obtaining the
loan was $3,000, it would take 30 months ($3,000/$100
monthly payment) to “break even” on the loan. In this
case, staying in the house three years or longer would
make it worthwhile to refinance. If you think you may
move before that time, it might not be beneficial.
4. Are you in a position to refinance your home?
One of the first issues, due to the decline in housing
values over the last two years, is whether the loan you
seek is reasonable, given the current market value of
your home. A number of homeowners, particularly those
who made a purchase with little money down before the
housing market collapsed, are finding that that they owe
more on their house than its current market value. In
that case, shopping around for a refinancing deal is
probably not a realistic option, as you could not obtain
a mortgage for more than the property is worth.
Alternatively, you may want to talk to your current
lender about the possibility of restructuring your loan
(keep in mind that they have no obligation to do this).
Another issue is whether you will qualify for a loan or
be able to obtain the most favorable interest rate. If
you have had problems with missed payments or other
credit issues in the past, or you recently suffered a
job loss, it may be more difficult to obtain a new
mortgage.
The primary appeal of refinancing is to reduce your
monthly payment and improve your household’s cash flow.
A financial planner can help you determine your
financial picture and cost-saving techniques.
Cathy A. Norris is a
Certified Financial Planner™ in Oldsmar, FL Contact:
813-814-2935 or
cathy.a.norris@ampf.com
This column is for informational purposes only. The
information may not be suitable for every situation and
should not be relied on without the advice of your tax,
legal and/or financial advisors. Neither Ameriprise
Financial nor its financial advisors provide tax or
legal advice. Consult with qualified tax and legal
advisors about your tax and legal situation. This column
was prepared by Ameriprise Financial.
Financial planning services and investments offered
through Ameriprise Financial Services, Inc., Member
FINRA & SIPC.
© 2009 Ameriprise Financial,
Inc. All rights reserved.
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