4 Questions You Must Ask Before Refinancing Your Mortgage

posted on 06-07-2019

At one point, I was addicted to the idea of home refinancing.

Internet popups would taunt me with historically low rates. And they were in the 3% range.

I kept watching the rates at our local bank, waiting to pull the refinance trigger. I wasn't happy with  a rate over 5%, but I wasn't sure I wanted to pay the fees.

When we got our  home, we paid three points to reduce the rate by 0.75%. We calculated it would take us four years to make the money back, and we'd save thousands over the course of the remaining payment years.

Points are fees you pay either to purchase or discount your mortgage. Each point represents 1% of the total amount financed. For instance, if you have a $160,000 home loan, one point costs $1,600.

Our bank offered to drop our rate by over 0.5% for just one point, but we decided we needed the money for home repairs.

Sure, rates have definitely jumped up in the past few weeks from when they were at rock bottom, but they're still low, from a historical perspective. And since rates have been so low, countless Americans have considered refinancing as well. And while my refinancing involved my primary residence, others may be looking to refinance their rental property or other types of investment property.

Whatever your situation, there are rules of the road that you need to follow. Otherwise, your dreams of getting big savings from a refinancing can turn into a nightmare.

Here's what you need to consider before refinancing:

1. How Long Will It Take For The Refinancing To Pay For Itself?

Refinancing can cost hundreds to thousands, but you just need a basic formula.

Divide the cost the bank quoted you for refinancing by the difference in your mortgage payment.

This will tell you the number of months it will take to pay off any fees. For instance, if you paid $1,200 to refinance your loan, and the difference in your mortgage payment is $50, it would take 24 months to pay off the refinancing fee.

2. Do You Have Savings For Home Repairs?

Especially if you don't have a home warranty plan, you need money available if the air conditioner breaks or the fence falls apart.

It's a good idea to have 10% of the price of your home in savings just in case you lose your job, need mortgage money or get stuck paying for major repairs. You might think you just need enough for one repair, but what if a tree bursts your pipes just after your air conditioner breaks? Each repair or replacement could cost thousands.

3. Do You Have Other Uses For The Money?

If you take the money out of your 401(k), you could suffer tax penalties for the retirement account withdrawal. If you have credit card debt, you could have used the money to pay off a credit card with a 20% rate.

In contrast, if you're earning a consistent rate of 5% on investments, it may not pay to take money out if your mortgage is less than 5%. You're earning more than you're paying on the debt.

4. Will Your Mortgage Start Over?

This often depends on whether you're offered a refinancing deal or a loan modification. A loan modification changes the rate for the rest of the loan, but refinancing starts the mortgage over.

For instance, let's say you have 22 years of payments left on a 30-year mortgage. If you refinance into a new 30-year mortgage, you'll be looking at eight additional years of payments. While the payment is likely smaller, you're still in debt longer. If you refinance a couple of more times, you could end up still having a mortgage when you're 90!

There is another option, however. If you're able to take your current 30-year mortgage (with 22 years of payments remaining, as I said previously) and refinance to a 15-year mortgage, you've saved seven years of payments. Then you just have to consider whether you can afford the payments.

The Investing Answer: Once you've carefully weighed whether refinancing is a good decision for you, get several estimates. You may be told by banks that rates can change tomorrow. While you shouldn't wait too long to make a final decision, take your time. You're going to be stuck with these payments for up to 30 years.

by Christian Hudspeth What's even better than earning rewards for spending on your credit cards? Getting paid hundreds of dollars worth in sign-up bonuses in three months or sooner -- just for tr...
by Christian Hudspeth Tired of dragging credit card debt around with you? Taking 15 minutes to transfer your debt to a credit card with generous balance transfer perks could save you thousands in...
by Christian Hudspeth If you're going to spend money anyway, then why not get paid for it?Whether you're looking for credit cards with up to 6% cash back, double flight miles, or even a free hote...
by Christian HudspethIn times where interest rates are on the rise, you may start hearing financial advisors and bankers sing the praises of an income strategy called "CD laddering" (short for ce...
by Susan Campbell Those of us familiar with selling property know real estate agents don't come cheap. With real estate agent commission and fees amounting to as much as 6% of the sel...
Beverly Harzog is a nationally recognized credit card expert, author, and consumer advocate. She blogs about credit cards at BeverlyHarzog.com. Being in credit card debt is the pits. I've bee...
by Christian Hudspeth If you haven't already felt the pressure to refinance your mortgage, you're probably really feeling it now. Mortgage rates are still hovering near historic lows. But ...
by Christian Hudspeth If you or someone you know is thinking about getting a home mortgage, you may want to know about the thousands of dollars in hidden charges that some lenders are quietly...
by Christian Hudspeth Money market accounts (MMAs) and savings accounts make great places to set aside your emergency fund money and earn some interest income at the same time.Simply put, these s...
by Christian Hudspeth It's true that auto loans and home loans offer attractively-low annual percentage rates (APRs), while credit cards offer borrowing power without the risk of ever seeing the ...
by Christian HudspethWant to keep your emergency fund safe while earning interest yields that are three to five times higher than a typical savings account? Putting your money into an FDIC-insure...
by Christian Hudspeth Question: Hi there. I need your advice. I'm only 19 and I really need to start investing. Where can I start? -- Tirelo M., Gaborone, Botswana Answer: You've defini...