Refinancing isn’t always the answer to finding fast cash
The debate over refinancing
Although advertisers talk about refinancing, it isn’t always a sure-fire way to find fast cash. Anyone who is thinking of refinancing needs to think about the pros and cons to the move. People who are chronic refinancers and jump on the lowest interest rates don’t always benefit in the long run. They have a long list of fees and closing costs that can add up and eat away at savings.
The real reason for a refinance
The first thing a homeowner should figure out is what their goal is for the potential refinance. Consumers need to be warned that refinancing doesn’t pay off debt, it just reorganizes it. Sure it is normally at a lower interest rate, but there are other variables that change to accommodate that change. Those variables may eat away at overall savings. Normally, reducing monthly payments is the most prevalent reason why consumers try to refinance, and debt consolidation is the second. According to Holden Lewis, economist for Bankrate.com, “Consumers need to talk to a professional to do the numbers and find out if the goal really is worth it. Getting rid of debt is a great thing, but if the rate cuts down on income drastically, it may not be the best option.”
When to refinance
After honing on the reason a consumer wants to refinance, the next thing to decide on is when. According to Bankrate’s 2008 Closing Cost Survey, the national average for closing costs on a $200,000 loan is $3,118. That is in addition to taxes, insurance and prepaid items like interest and association dues. Consumers need to remember that getting a lower interest rate extends the length of the loan and, in turn, can cost more in interest. For example, replacing a mortgage that has 20 years remaining with a 30-year mortgage results in a higher interest expense over the entire lifespan of the loan and may mean a much larger interest payment overall. There are two calculations to follow when trying to find fast cash from refinancing:
- One calculation where the new loan has the same term as the old loan
- One calculation where the new loan is the length of the planned refinance
From there, consumers can compare the interest savings to see if refinancing reaches their financial goals.
When to not refinance
There are specific instances when a refinance will not help. For example, if a homeowner doesn’t plan on staying in a home for very long, it’s most likely a better idea to stay in the current mortgage. Considering the number of months of savings they need to recoup closing costs, it may take longer than they plan on living in the property. Also, people who are underwater with their mortgages most likely should stay with their current mortgage. It’s highly unlikely a homeowner in an underwater position will find a lender.
Another reason to not refinance is hefty prepayment penalties. The penalty payment creates another expense for homeowners to factor into the overall cost of the refinance. Homeowners would be better served by waiting beyond the initial two or three years when the prepayment penalty is active. Most likely consumers will have a better chance of refinancing further down the road.
The benefits of refinancing
Despite the tricky calculations regarding refinancing, it still can benefit many homeowners if done in the right way and at the right time. Refinancing can help consumers find fast cash if they are smart about making the decision. A good financial planner or online banking tool can help steer consumers in the right direction when facing the prospect of refinancing or not.