interest rates on a downslide, you're visiting hsh.com because you're
tempted by the lower interest rates. Refinancing seems like a great
way to save money. In fact, you're smart to be tempted to refinance.
You'd be nuts to pay some bank more of your hard-earned money than
you have to in interest. But don't make your decision based on conventional
wisdom. It may cost you a fortune!
Conventional Wisdom #1: Refinance when rates
have dropped 2%.
Real Wisdom #1: Invest the time to think through
how long you're likely to live in your house -- or your refi may
easily cost you more than sticking with your current loan. You
gotta crunch the numbers from time to time. Now that the rates
are so low would be an especially good time!
The right time to refinance is when easy calculations show that
you'll save money -- forget about the spread in rates! The longer
you intend to be in your current home, the less rates need to
drop for you to save money. Sometimes, less than a 1% drop will
save you money. Here's how to figure that out:
Ask a lender, go to www.hsh.com/pamphlets/refi.html or use a
software program (like my Banker's Secret Loan Software, $42.95,
800-255-0899, www.investinyourself.com/tbs2.htm) to calculate
the total cost of your current loan -- between now and when you
plan to move (say in 7 years)-- not for the remaining term of
Then do the math for a new loan with the same term, but at the
lower rate you could get now. (Add closing costs to the amount
you'll be borrowing.) For detailed instructions, see "Buying
the Right Mortgage -- New or Refinanced," beginning on page
#242 in my new book, Invest in Yourself (1998, Wiley, $22.95).
Conventional Wisdom #2: By refinancing you'll
be saving money every month!
Real Wisdom #2: To really save money, invest
at least as much money in your new refi as you do in your current
home loan. While refinancing reduces your monthly payment, it
also typically stretches out the term of your loan -- which can
dramatically increase your total cost. That's because the heaviest
interest charges are at the start of the loan, and beginning a
new loan means making those high interest payments all over again.
And if you take the full time to pay off the new loan, refinancing
could easily cost you more than sticking with your current loan.
Conventional Wisdom #3: To save the cost and
hassle of refinancing, just pre-pay on your current loan. You
can save thousands.
Real Wisdom #3: Investing in your mortgage always
makes sense to me! Whether or not you refinance your current mortgage,
it's true you'll save thousands (perhaps tens of thousands) by
paying as much over the required amount as you can, whenever you
can. But that doesn't mean you shouldn't refinance! It's worth
an investment of your time to save your family a fortune.
At least run the numbers. If your number crunching indicates
that refinancing will save you money, do it! Then pre-pay by sending
in at least as much as you had been paying before you refinanced.
By combining refinancing with pre-paying, you can quadruple your
savings from refinancing alone.
Conventional Wisdom #4: Consolidate all your
debts with a refi. "You'll lower your interest rate and lower
your monthly payments," say the ads. "There'll only
be one payment, and there might even be tax deductions. How can
Real Wisdom #4: Invest the time to look at your
spending habits and lifestyle -- before you buy the sales pitch
from some baseball has-been on TV. Are you really ready to stop
charging, or are you going to start running up those credit card
If you're ready to stop buying things you can't afford, and the
numbers show that you'll save money, by all means, go for a debt
consolidation refi. Be sure to send in as much money on the new
mortgage as you had managed to send in on the old mortgage and
all those bills combined.
Don't be surprised, though, if you'll have to pay slightly higher
interest than the going rate. Why? Because lenders believe that
people who borrow more than the amount they owe on their current
mortgage are more likely to default.
If you're likely to run up balances on your credit cards again,
you may end up in BIG trouble. What would happen if you lose your
job? You'll have even more bills to pay, less home equity, and
you might even face the threat of foreclosure.
Never take out a loan based only on the monthly payments. In
fact, never buy anything based only on the monthly payments --
unless you really get off on paying too much for things.
Conventional Wisdom #5: Refinance and borrow
extra to pay for a home improvement or family vacation.
Real Wisdom #5: Invest in some serious soul searching
before you borrow a bigger amount -- which could wipe out the
home equity you're accrued over the years. Remember, your house
is on the line! Home improvements can be good investments, but
many can be done slowly, over time, with your own "sweat
equity" -- rather than by eating into the equity you've worked
hard to attain. And while a fabulous family vacation sounds awfully
appealing, the great memories could quickly fade if times get
tough and you're mired in debt.
Conventional Wisdom #6: Fold the upfront closing
costs into your refinanced loan. Lenders are happy to do it.
Real Wisdom #6: Invest the time to think through
what's really in your best interest. You can't count on the lender
to do that. And remember, anytime a lender suggests that you "fold
in" costs on an already big loan, you're likely to lose in
two ways. First, you probably won't comparison shop or negotiate
fees as hard if you're not paying them upfront, out of your pocket
-- so you may pay more than is necessary in closing costs. Then
you could get stuck paying interest on these high-priced fees
for a long time, maybe as long as 30 years!
Conventional Wisdom #7: As long as you're refinancing,
go for a 15-year term if you can swing the payments.
Real Wisdom #7: We're all for paying your mortgage
off as quickly as possible. But just because you can swing the
payments for a 15-year mortgage today, can you be sure your financial
situation won't change in the years to come? I doubt it.
Take out a 30-year mortgage, and pay it off like it's a 15 year.
If you do ever run into rocky times, you can slack off and just
make the regular payments for a while, without worrying about
getting behind on your mortgage.
Marc Eisenson's new book, Invest in Yourself: Six Secrets to
a Rich Life (Wiley, 1998), which he wrote with Gerri Detweiler
and Nancy Castleman, analyzes how we can spend our time, energy,
and money for the greatest payoffs in life. The book is available
in bookstores everywhere and through Marc's Web site: www.investinyourself.com.
"Invest in Yourself won't tell you how to make a lot of
money, but it will explain how you can live better on less than
you think while saving money. The payoff is substantial: reduced
stress, more security, a happier family, and a richer enjoyment
of life. When the authors tell you to Invest in Yourself, they
want you to recognize that you can use your knowledge and abilities
to make a better life -- and do it on your own terms."
-- Paul S. Havemann, Vice President, HSH Associates
The nation's largest publisher of mortgage information
"Put life planning dream team to work for you.
When it comes to financial planning -- indeed life planning --
Marc Eisenson, Gerri Detweiler and Nancy Castleman are a dream
team. ... Now they have combined energies and written a remarkable
and inspiring book, Invest in Yourself (John Wiley & Sons,
Inc, $22.95). The authors promise a lot -- the book's subtitle
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get their money's worth and more."
-- Jeanie Blake, The People Helper The New Orleans Times-Picayune