The radio is full of commercials offering 4% interest rates, no closing costs, and many other dream offers. But there are some things you should know. First of all, not surprisingly about 90% of advertised lending offers are only for those with PERFECT credit, PERFECT home values, etc. The reality is that we all know if it sounds too good to be true, it is.
So, where should you start?
Do the Math. Figure closing costs and overall savings. There are always closing costs and someone has to pay for them, most likely you. This will be several thousand dollars. If a new loan is going to make sense, then you need to be in the house longer than it takes to break even on those costs. For example, you are initiating a new loan, which will save you $200 a month, and your closing costs are $3000. It will take you 15 months to break even on those costs. Does that make sense? If you finance those costs into the loan, it will take even longer due to the interest you will pay. Click here for a refinance breakeven calculator.
What is your real savings? Your lender should be able show you what your real interest totals. Compare this to what you have left on your current loan.
Are you extending the term of your loan? If you only have ten years left on your mortgage, and you are refinancing for another thirty years, is this your best option? If you are close to retirement age, then extending the loan may not make sense. Take a look at your overall financial goals.
Are you financing old debt into the new loan? While rolling credit card debt into your mortgage can help with short term cash flow, are you committed to making the changes in your life to make sure that the credit card debt doesn’t accumulate again? Over 70% of the people who consolidate their debt end up replacing that with new debt.
Do you trust your lender? There is a huge increase in refinance and loan modification scams. In fact, the FDIC has new literature out just to address this issue. You can find out about the common scams here. At the end of the day, you should understand your new loan so well that you could explain it to someone else. When you do, you may realize that a refinance just doesn’t make sense right now.
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