To Refinance or Not to Refinance?

Ray’s Take: According to The American Mortgage in Historical Context, 30-year mortgages are a relatively new thing. In the time before the Great Depression, mortgages had short maturity times and usually required a very high down payment. Pre-Depression mortgages featured variable interest rates and were usually renegotiated on a yearly basis. Boy, have times changed!


I always get the question from clients and friends about when and if they should consider refinancing their home. There are many reasons people decide to refinance their mortgage. It could be to shorten the term of the loan, get cash out of the equity for a large purchase, to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice-versa, or to consolidate debt.


The most common scenario for refinancing is when interest rates drop considerably from the time when you bought your home. A lower interest rate helps you build equity in your home faster and it decreases the size of your monthly payment. I have heard lenders say you should refinance if you can reduce your interest by 2 percent, but now I’m hearing that even a 1 percent savings is an incentive to do it.


Refinancing typically costs 3 to 6 percent of the loan’s principal. So it will take years to get that money back from the savings generated by a lower interest rate or shorter term. It’s important to ask yourself how long you plan on staying in your home before considering refinancing. If you aren’t planning on staying in your home long-term, the cost of refinancing could negate any of the potential savings.


But don’t get too caught up trying to pay off your home early if you do not have retirement savings, need to pay-off high interest debt or start an emergency fund. It’s important to consider the big picture of your overall financial plan. And always consult with your financial adviser before refinancing.


Dana’s Take: Ray’s late father, E. Denby Brandon Jr., shared a lot of wisdom with us. One of his favorite topics was distinguishing an asset from a liability. He said that an asset should pay you money, while a liability costs money. By that definition, a house is a liability rather than an asset.


If any of us kept careful records of how much we spent on the upkeep of our homes, including interest, property taxes and repairs, we would realize that the purchase price is only a small part of the cost of homeownership.


Can you afford to keep investing so much in an asset that’s costing you tons of money? Would renting free up money to save and invest? These are tough and emotional choices. Home is where the heart is and it’s often where your money is, too.


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