Posts Tagged ‘financial situation’

Pros and cons of refinancing

Posted on: November 16th, 2012 by

Up in the air about refinancing your mortgage?

That’s okay. Refinancing, which is essentially the process of paying off your existing mortgage with a new one, isn’t the right option for everyone. And for this reason, it’s important to weigh out the pros and cons.

By doing so, you can determine if you’ll actually benefit from refinancing.

For example, you could be lowering your interest rate by 25 percent, but if that comes with thousands of dollars in closing costs, it could take a long time to break even, says Shashank Shekhar, a loan originator with Arcus Lending in San Jose, California.

Not an easy decision is it? To help, we’ve hashed out the pluses and minuses of refinancing to see if it makes sense for you and your Financial Planning - Rockville, MDfinancial situation.

PROS:

1) This is perhaps the biggest pro of refinancing your mortgage: a lower interest rate.

Of course, you’ll need to first qualify for the lower rate, but if you do – you could be saving a lot of money. In fact, even an interest rate that’s a half percent less could garner a good chunk of savings.

Just consider this example from the Federal Reserve, which compares the monthly payments on a 30-year fixed-rate loan of $200,000 at 5.5 and 6 percent interest.

2) What exactly is the benefit of refinancing to a shorter term mortgage, you ask?

For starters, shorter-term mortgages – like a 15-year mortgage versus a 30-year mortgage – generally has lower interest rates, according to the Federal Reserve.

What’s more, the shorter your mortgage term, the sooner you’ll be out of debt and the less interest you’ll have to pay in the long run.

For example, the Federal Reserve says to compare the total interest costs for a fixed-rate loan of $200,000 at 6 percent for 30 years with a fixed-rate loan at 5.5 percent for 15 years.

While the total interest savings are indeed significant, “The trade-off is that your monthly payments usually are higher because you are paying more of the principal each month,” says the Federal Reserve.

3) Cheat sheet: an interest rate on a fixed-rate mortgage (FRM) remains the same for the life of the loan, while an interest rate on an adjustable-rate mortgage (ARM) adjusts periodically based on an index.

And if you currently have an ARM, now is a great time to refinance to an FRM.

In fact, with rates at historic lows, an average of 3.39 percent on a 30-year fixed-rate mortgage as of November 1, according to federal lender, Freddie Mac, there may not be a better time to refinance.

“Given the uncertainty in the real estate market and the historical low rates on offer now, I always advise my clients to go with a FRM wherever possible,” explains Shekhar.

So, to avoid any uncertainty with your mortgage payments, you may want to refinance and lock in today’s record-low rates.

If you’re still unsure, then consider this: If you stick with an ARM and rates go up in the next few years, will you be in utter regret?

CONS:

1) Have you struggled to make your last few credit card payments? Has your credit score suffered as a result?

If so, refinancing may not be in your best interest, especially since a bad credit score often means having a higher rate when you refinance, explains Shekhar.

“For every 20 point drop in credit from 740, you pay higher in closing cost, interest rate, or both,” says Shekhar. “In some cases, your closing cost can increase by 2 percent or more.”

As you can see, a bad credit score could definitely work against you during the refinancing process.

So, before you refinance, it might be a good idea to try and improve your score by paying credit card bills on time and keeping balances low on your credit cards, according to myFICO, the consumer division of the Fair Isaac Corporation, which provides a global standard for measuring credit risk.

2) Getting a lower interest rate sounds great, right? Of course it does. But like most things in life, there are costs that come with refinancing  – and these costs could really add up.

“It is not unusual to pay 3 percent to 6 percent of your outstanding principal in refinancing fees,” according to the Federal Reserve, which adds that fees could include an application fee, loan origination fee, an appraisal fee, and more. “These expenses are in addition to any prepayment penalties or other costs for paying off any mortgages you might have.”

A prepayment penalty, in case you’re wondering “is a fee that lenders might charge if you pay off your mortgage loan early, including for refinancing,” according to the Federal Reserve.

So, before you refinance, you’ll want to do some research and make sure that the refinancing savings will outweigh any and all fees.

3) Planning to move out of your home in the next few years? If so, it may not be the right time to refinance.

Why? Because if you move soon after you refinance, “The monthly savings gained from lower monthly payments may not exceed the costs of refinancing,” the Federal Reserve says.

If you will be moving – and you still want to refinance – the Federal Reserve suggests using a break-even calculation, which could help you figure out whether it’s a smart decision.

Unfortunately, sudden changes like job relocation or a divorce may be out of your hands.

But if you do sense that the future in your home is a bit unstable, you may want to hold off on refinancing.


Financial Planning – Questions to Ask Before “I Do”

Posted on: May 12th, 2010 by

Financial Planning - Getting Married - Rockville, MDWhen you think about it, couples don’t fight over love; they fight over money.  They fight because one person didn’t balance the checkbook or made a dumb investment without consulting the other.  They fight because one partner exerts dictatorial control over the money, or because one has secretly amassed thousands of dollars in debt on a credit card.  Whether the issues are big or small, money will prove a powerful force impacting your marriage.  What couples don’t always understand is that money is rarely the real culprit.  It’s the lack of communication, often stemming from a lack of knowledge about each other’s personal financial status and beliefs.  With that in mind, you need to ask the important questions before tying the knot.  A major question to ask is what your partner’s assets and liabilities are.  This question is paramount because assets and liabilities are the basic building blocks of the financial life you’ll live together.  Assets will help you strive for the life you want.  The liabilities will hold you back.  Your goal should be to pinpoint where you are financially as a couple so that you can map out where you want to go together.

Another essential topic to discuss is how you are going to divide the financial responsibilities.  Maybe one of you takes charge of investing and the other balances the checkbook.  Your wisest move is to play to each other’s strengths.  If you’re good at challenging bureaucracy, maybe you agree to handle the insurance companies and the medical bills.  The point is that you both have an obligation to the family’s financial well-being, and both of you need to be aware of the household’s financial situation.

Finally, you need to discuss whether or not you want to combine your accounts or operate individually.  This is a divisive issue.  Many financial pros argue that operating from individual accounts helps maintain marital peace.  Since neither partner knows what happens in the other’s account, they believe that less bickering will occur.  I say, maybe.  You could also make the argument that individual accounts mask the family’s true financial position, which can draw away from the main purpose of marriage: operating as a team.   If neither of you know how much money is really flowing through the individual accounts, nor how much is being saved and invested, then it’s impossible to plan a future together.  That’s not to say that individual accounts don’t work; they just require a lot of openness.  Ultimately, this, along with the other questions, boil down to one thing: communication.