Welcome to RefinancingAdvice.com, presented by Professor Randall S. Guttery,
Ph.D., CLU, ChFC. As the refinancing decision expert for USA Today, Dr.
Guttery has helped many individuals determine whether they should keep their
existing residential mortgage loan or replace it with a new loan. Click here to see USA Today for scores of sample
refinancing questions that Dr. Guttery has answered for USA Today
readers.
Before you decide to refinance, take a moment to read "Should I Refinance?" below. To have Dr. Guttery assess if refinancing is in your best interest, complete the Refinancing Data portion of Hire Dr. Guttery. Once you submit your information, Dr. Guttery will advise you via e-mail. Fee and other details are discussed in the Agreement portion of Hire Dr. Guttery.
Should I Refinance?
Maybe. Maybe not. As Dr. Guttery tells his real estate students, “It
depends.” The refinancing decision is not as simple as dividing your refinancing
costs by your monthly saving, and then comparing this result to how long you
likely will remain in your house. In other words, if it will cost you $3000 to
refinance your new loan and you will save $100 per month, this decision is much more
complex than to suggest it will take 30 months (i.e., $3000 cost / $100 saving)
to recoup your closing costs. One must consider the present value of the
benefits of refinancing and compare to the present value of the costs of
refinancing. Otherwise, many refinancing pitfalls may occur.
In particular, you should consider:
- Your anticipated holding period of the new mortgage loan
- When you plan to move
- When you plan to refinance again
- Your employment and credit history
- Prevailing interest rates today
- Anticipated closing costs to refinance, including discount points
- Your current interest rate
- The term of your current loan (e.g., 15 years, 30 years)
- The types of current and proposed loans (e.g., fixed-rate, ARM, balloon)
- The amount of equity you have built up
- Overhang (i.e., refinancing for longer that your current mortgage’s
maturity)
- Retirement of debt before mortgage maturity
- Differential future unpaid mortgage balances of current and proposed loans
- Time Value of Money, given an appropriate discount rate
Generally, five reasons are offered for refinancing an existing mortgage.
First and foremost, a borrower may wish to take advantage of lower prevailing
interest rates, relative to the existing loan’s rate. All else held equal,
this will afford a lower mortgage debt service payment. Second, a borrower may
choose to change the type of financing. For example, one may refinance an
ARM with a fixed-rate loan.
Third, one may wish to change the term of the current mortgage loan.
Often, borrowers will refinance a 30-year loan with a 15-year loan. If this is
done when rates are significantly lower than the contract rate on the existing
mortgage, one may be able to keep the debt service payments about the same,
although the term of the mortgage is reduced. Fourth, many borrowers refinance
to draw some of their equity for the children’s education, retirement,
health care, vacations, and so forth. Fifth, one may refinance to remove
Private Mortgage Insurance (PMI), provided there is at least 20-25 percent
equity in the home.
Of course, borrowers often refinance for several of these aforementioned
reasons.
