The Porch Light copyright by Revka (2006-2010). All rights reserved.

Tuesday, August 14, 2007

Refinancing - One Less Worry

clip art courtesy of

I have had three major concerns weighing on my mind: preparing for the inevitable hurricane, creating a will, and refinancing our home. I am very happy to say that at least one of those worries is about to be laid to rest for good. We are refinancing our adjustable rate mortgage, and it appears that we will acquire a fixed rate mortgage in about one week.

For us, refinancing was a smart move for a few reasons:
  • refinancing means that we will have an a fixed rate instead of an adjustable rate.
  • the real estate market here continues to be strong; in fact, in one and a half years, our modest home has increased in value by nearly $40k. (Can you believe it?!)
  • due to our home's appreciation, we will no longer have PMI on our loan, which decreases our monthly payment by about $25.
  • we were able to get a lower interest rate than we have with our initial loan.
  • we have no plans to move in the foreseeable future.
Refinancing is not the best option for everyone, Here are two big reasons not to refinance:
  • if you plan to move within five years, you may not have time for your monthly payment savings to recoup the costs associated with your new loan.
  • if you cannot secure an interest rate that is at least two percentage points lower than your current interest rate, odds are high that you will move before being able to recoup the loan's costs. (Apparently, homeowners average length of residence is 6.6 years.)
Also, as a former loan processor, I advise against refinancing for debt consolidation. I understand that some people believe this is their only feasible option, but here are the drawbacks as I see them.
  • The debts that are consolidated into the mortgage are not really paid off. You will continue to pay interest on them for as long as you pay on your new mortgage.
  • Consolidating debts by refinancing means that you borrow more money for the mortgage, which means that the monthly payment will be higher than it would have been had you not used the loan for debt consolidation.
  • Many people who refinance for the purpose of consolidating their debts fail to close accounts with a zero balance. Eventually, most of these people run up a new balance on these accounts, placing themselves in an even worse predicament than they had been in.
I'm very glad to have this worry taken off my mind, and I feel confident that we have done the best thing for our family. If you are considering refinancing, please make sure to conduct the research necessary to be fully informed regarding this important decision.