Is It Time to Refinance Your Home? Answer These 4 Questions

Is It Time to Refinance Your Home? Answer These 4 Questions
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By no means have I figured out the meaning of life, but over the years I have discovered a few simple rules to live by. For instance, never play cards with anyone who has a city as their nickname. If you have money on the line with “Vegas” Pete or “Toledo” John, odds are you are going to lose all your money. I try to avoid restaurants where the name gives reason to pause. If the word “Dirty” or “Hairy” is in the title, or it’s called “Bugsy’s,” I’m probably going to pass. Maybe I’m missing out on some great culinary experiences, but I’ll play it safe.


Now that we’ve established my credibility as a life coach and mentor, I’d like to share a financial rule to live by. It’s pretty straightforward, but often ignored. Simply put, when borrowing money for a house, car or boat, do not focus on the payment. It may sound like common sense, but over the years many of my friends and loved ones have fallen victim to this financial misstep.


When negotiating to buy a car, have you ever had a salesman pivot from the price of the vehicle to asking now much you can afford to pay? Of course, because by focusing on the payment, the salesman can extend the terms to five, six, or even more years. It’s not to say your cash flow isn’t important, but the payment is the wrong variable to make your best decision.


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Cars are one thing, but the stakes are exponentially higher with mortgages. Buying a house is one of the biggest financial transactions in your life. There are many complexities including fees, interest rates, tax implications and personal considerations, such as how long you plan to own the property. Each situation is different, and you are always best served by doing your homework and getting the advice of trusted professionals.


That being said, one of the few benefits of being in this current pandemic is that interest rates, including mortgage rates, are historically low. Many are asking if now is a good time to refinance. My answer? It depends. Here are a few things to consider before you move forward:


Are the terms of the new loans better? If you aren’t getting a lower interest rate than your current loan, you are likely lowering your payment by extending the loan back to 15 or 30 years. This is not normally a good reason to refinance.


How long does it take to recover the costs of the refinance? In most cases, the costs of the loan refinance, as high as 2 or 3 percent of the loan, are added to the mortgage balance. While your new payment may be lower, your mortgage balance could go up by thousands of dollars. If you can recover those costs relatively quickly, then it may be a good move. You have to do the math.


How does the amortization schedule of the new loan match up against your current loan? Looking at both loans in an “apple to apples” comparison is ultimately the best way to evaluate your options. This approach allows you to focus on the long-term impact of the decision versus the short-term gain in a lower payment.


Finally, are there other underlying issues for your reason to refinance? Often people refinance to “cash out” by borrowing more than they currently owe in order to consolidate debt, fund a home renovation project, buy a second property or invest in the stock market. I can’t say what’s right for your situation, especially if you are dealing with financial challenges, but I can say “pump the brakes” before you jump at what may seem to be easy money. It would be wise to look for other options before adding thousands in fees and extending a mortgage for years.


If you run the numbers and a refinancing makes sense, make sure you shop around for the best rate. The internet can certainly be your friend in doing your research. Given the current environment and low interest rates, many banks are backlogged with refinancing application requests so you may need to be patient. Ultimately, while not all refinances make sense, it might be a good time to run the numbers to see what makes sense for you.


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About the Author

Col. Jim O'Brien, USAF (Ret)
Col. Jim O'Brien, USAF (Ret)

O'Brien, MOAA's executive vice president and chief operating officer, served in a variety of financial management positions at all levels of the Air Force, including four command positions. His final assignment was comptroller for the Air Force Reserve, where he was responsible for nearly $5 billion annually.