How Refinancing Can Steal Your Equity
It’s bound to happen. Six months, 12 months even 18 months down the road you’ll get a phone call, a mailer or maybe see an advertisement telling you how if you refinance today, you’ll reduce your rate to “X”% and save thousands.
If you find your payment is bit more than your budget can stand every month, then the long term consequence may not be the most important consideration. In this instance you most certainly want to consider the cash flow benefits that refinancing can possibly provide for you. Whether interest only or simply a interest reduction. The key to this situation is insuring you learn from the mistakes that created the cash flow crunch and not repeating them!
However, for those who find they are quite comfortable with their mortgage payment, refinancing may not be the great deal it seems, even if you are reducing your terms.
You’ve already made payments. All the interest you have paid will have been wasted and must be factored into the cost of refinancing into another note. Closing costs are now a “New” expense that must be added into the cost. So if you’ve paid 6k in interest and your new closing costs will be an additional 3k then your total savings better exceed 9k just to break even. If you’re planning to be in your first home for less than 5 years, the average length of time a first time home buyer stays in a home, you can expect it to be nothing but cost with no benefit.
If you are talking about reducing your terms from a 30 year note to a 15 year note, in most instances you as a home owner can simply increase the amount of your payment to match any proposed payment and achieve the same affect at a lower NET cost.
So before jumping into any refinance deal that will steal your hard earned equity, be sure to look at all the costs, not just the costs to refinance or the payment that results.