Wealth Building Lessons

Refinancing an existing mortgage costs money. In act, it costs a lot of money. There really shouldn’t be any reason to refinance unless the new rate is 2% lower than the old rate, or you’re switching out of an adjusted rate mortgage (also called an ARM) into a fixed rate product at the same rate.

Most brokers will try to get you to refinance even if they can save you 0.5% by enticing you to pull out money. They’ll sell you on a cash-out refi, saying you can pull out say $15,000 and keep the same monthly payment, or even lower it by $25 per month. One thing they may not tell you upfront is that your fixed rate mortgage may adjust in 3 years, increasing your payment 25%. Unless you read all the loan documents presented to you or are smart enough to know what to ask upfront, you probably won’t realize just how much this will negatively affect you.

One thing the broker most likely won’t disclose and isn’t even required to disclose by law is the added duration of the new loan. For example, if you acquired a 30-year loan three years ago, then you will only have 27 years left on your mortgage before the loan is paid back in full. However, a new (refinanced) loan may set you right back at 30 years so you’re essentially starting from scratch. This in itself will cost you thousands of dollars in added interest payments.

If you still feel included to refinance your loan then make sure the break-even on the fees are 2 years or less. You can get an upfront estimate of the fees through a Good Faith Estimate or GFE. Brokers are required by law to provide this, but many only provide it at the closing table.

If you are pulling money out as part of the refinance, make sure you’re not spending it on a new car. You definitely do not want to spend the next 30 years paying for a car that will be gone in 10 years. Try and spend it on things that improve the value of your house like a new kitchen or a new bathroom. Alternatively, invest it in a diversified portfolio of assets and follow sound investment principles and judgment. Do not fall for the temptation of venturing into speculative investments and putting all your eggs in one basket where you risk the chance of loosing everything. This is where the services of a good financial advisor come in handy.

For assistance on deciding whether refinancing is right for you, consider using a financial calculator. BankRate has a good one. Remember, arm yourself with the necessary knowledge and consider your refinancing ventures wisely.

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