Refinancing Doesn’t Always Translate To Saving Fast Cash

The debate over refinancing

Although advertisers talk about refinancing, it isnt always a sure-fire way to find fast cash. Anyone that is considering refinancing needs to weigh the pros and cons of a refinance. Chronic refinancers that always capitalize on lower interest rates don’t always profit over the long term. They have a long list of fees and closing costs that can add up and eat away at savings.

The reasons for refinancing

The first thing a homeowner should figure out is what their goal is for the potential refinance. People must be aware that refinancing only reorganizes debt. Sure it is normally at a lower interest rate, but there are other variables that change to accommodate that change. Variables can chip away at savings. Reducing monthly payments is the typical reason behind refinancing, 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 you should refinance

After honing on the reason a consumer wants to refinance, the next thing to decide on is when. The Bankrate 2008 Closing Cost Survey indicated the national average on closing costs for a $ 200,000 loan was $ 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:

1. One calculation where the new loan has the same term as the old loan
2. 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 you shouldn’t refinance

There are specific instances when a refinance will not help. For example, if a homeowner doesnt plan on staying in a home for very long, its most likely a better idea to stay in the current mortgage. Taking the savings that people must accumulate to cover closing costs, the stay in the property could be longer than anticipated. People with underwater mortgages should probably stay with the current mortgage. Its 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 might be better off waiting until the initial two or three years of the active pre-payment penalty has passed. 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.