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Cheri Merz

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To Refi or Not To Refi? Continued...
2/21/2006 12:15:46 PM
This thread is a continuation of the article "4 Reasons Not to Refinance". Please begin there for the first half of the article and commentary. My comments on this half are again in red. ============================================ Set goals, read up, calculate Here’s how to know if you should refinance: Define your goals. Do you want to lower your monthly payments? Build equity faster? Get money for a home improvement project or other cause? Each goal will affect the kind of loan and terms you’ll face. “Once the goal is established it is pretty easy to see if (refinancing) makes sense or not,” said mortgage broker Allen Bond of Palos Verdes Funding in Palos Verdes Estates, Calif. “Some people are actually going from a 30-year to a 15-year loan and increasing the payment, but saving considerably over the long run. For those that just want (lower monthly payments), that would not make sense.” You may be able to accomplish more than one goal, though. Duncan, for example, recently refinanced from one 15-year loan to another at a lower rate. He not only lowered his payment but got cash out to help pay for a child’s college education. (He did have to pay a slightly higher rate than had he simply refinanced what was left of his mortgage balance -- typically taking cash out of a refinance will increase the rate you pay.) Educate yourself. Read about how the refinancing process works, get a copy of your credit report and score so you know how lenders view you, and start shopping for rates and terms. Start with your current lender, who has an incentive to try to keep you as a customer. Don’t stop there, however. “There are 7,500 lenders out there,” Duncan said. “If you’re talking to just one, you’re not taking advantage of the competition.” Web sites such as E*Loan can give you a good idea of what the costs are for refinancing to a variety of different loans. You can also call several lenders or use a mortgage broker (preferably one who’s been in the business several years and who is affiliated with National Association of Mortgage Brokers) to help you review your options and the associated costs. Working with a good broker can be especially smart if you have troubled credit, since the rates typically quoted on Web sites may not apply to you and you’re at greater risk of being a victim of so-called “predatory lenders.” Ask about all the costs of a loan, including all the points and fees you’d be expected to pay. Technically, lenders aren’t required to disclose their charges in what’s known as a “good faith estimate” until three days after you actually apply for a loan. But reputable lenders will be happy to disclose their costs if you ask. And don’t, by the way, buy the idea that there’s such a thing as a “no cost” refinancing. Loans always have costs, although they can be disguised as a higher rate or fees that are added to your principal. Look for an upcoming article on Yield Spread Premium, the mortgage industry's dirty little secret. Run the numbers. Once you’ve got some options, you can compare them to the costs of the loan you have now using one of the mortgage refinancing calculators available on the Web, such as the one at Bankrate.com. This can show you your “breakeven” point: when (or if) the savings from the new loan would offset the costs of refinancing. If you’re going to be in the house long enough to reach that breakeven point, you might want to proceed. There are two caveats here, however. Sims, for one, doesn’t believe in spending money on a refinancing if the breakeven point is more than three years away. That’s too long to wait for a payoff, he says, and many homeowners will end up selling their homes before they reach that point. Look at the total costs You also need to look at the total costs of the loan over the long term. Even if you have a much shorter breakeven point, for example, you could wind up paying more for a new loan if you’re several years into your current loan or if you’ve made substantial extra payments on your mortgage. Rasik Desai, a New Jersey homeowner, discovered he wouldn’t be much better off refinancing his mortgage, even though he could get a much lower rate and lower his monthly payment. In 1993, Desai got a 30-year mortgage for $97,500 with a 6.75% fixed rate. Four years later, he began making $200 extra payments each month to pay down the principal. Even though he can get a 15-year mortgage on the remaining $68,000 balance for a lower rate -- 5.5% -- he discovered he’ll pay less over the long haul by keeping his current mortgage. “If I do not refinance and continue to prepay $200 a month extra, I will be paying off my mortgage in 110 months,” paying a total of $91,670, Desai said. If he refinances and continues prepaying the mortgage, it would take longer to pay off the loan -- 117 months -- and cost slightly less: $88,457. But add in the $2,600 costs of the refinance, and his pre-tax savings would be just $614. Desai has decided it’s not worth the bother. Stretching out your payments just makes matters worse. People who are 20 years into a 30-year mortgage will find they can spend tens of thousands of dollars more over the long run if they refinance into another 30-year mortgage. Once you’re far into a loan, “most of what you’ve got left to pay is principal anyway,” Sims notes. “You might as well keep paying (on your old loan).” See my reply to Donna's post in the first half of the article for further discussion of this point. ============================================ Cheri
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Donna Zuehl

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Re: To Refi or Not To Refi? Continued...
2/21/2006 4:25:21 PM
Thank you for this forum Cheri. It is informative and very important information. My husband is frequently wanting to refinance when interest rates drop but I am reluctant and skeptical about the supposed savings. Your article explains some of the details most people don't think about. DonnaZ
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Winston Scoville

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Re: To Refi or Not To Refi? Continued...
2/21/2006 8:58:46 PM
Great article Cheri. Definitely some food for thought.
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Linda Miller

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Re: To Refi or Not To Refi? Continued...
2/26/2006 5:27:27 PM
Hi Cheri, Thanks for these great articles. They are right in line with Oprah's "Debt Diet." Have you seen her show about this? She and her experts are profiling 3 families and putting them on a debt diet. The whole thing is quite enlightening! Thanks for the care you give with the information you share!
Help us spread the message to the world... http://www.themessage2000.com/messengers/lindamiller Linda Miller 828-652-4714 Nebo, North Carolina
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Cheri Merz

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Re: To Refi or Not To Refi? Continued...
2/26/2006 5:44:50 PM
Hi, Linda, Thanks for coming by and for posting. No, I haven't seen Oprah's shows on this subject, but I'm glad to hear that another famous person with a big reach is showing people the right way to do this. When I first joined the company that I now promote, I considered myself quite knowledgeable about credit and money management. After all, I had managed to keep our credit very good for years, even if we were still in debt. Then when I realized that in order to do what I wanted to do with the product I had, I would have to write about these matters, I thought, Why bother? After all, Suze Orman, Dave Ramsey, David Bach are all saying the same things, where's the room for another expert? I didn't think there would be any way to establish myself. Then along came Adland, and I've learned so much here! Like the fact that no matter how famous someone is, there's someone who hasn't heard of them, or didn't get the memo about the show (or the book, or the forum)... And the fact that 10 different people talking about the same thing will say it slightly differently and someone will 'get it' for the first time because someone says it with different words. So, thank you for your support! It means a great deal to me. I hope I can reach a few who would otherwise not have gotten the memo. :-) Cheri
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