March 22 • 05:00 AM

Refinance for the right reasons only!

August 15, 2007

I enjoy reading your articles as your advice is straight and to the point. You tell people what they need to hear not what they want to hear. However, I haven't seen your articles the last few weeks. Where have you been?

— J.R., Almont

J.R., The readers out there need to keep the questions coming. I can't answer any questions if the readers don't call or email me with them. Don't be afraid or embarrassed to "Ask Alex". I am glad you like the column and I hope it has helped you and other readers make smarter choices in regards to real estate and mortgages. Since you did not really ask me a real estate question I will use this column to talk about something that costs homeowners thousands of dollars every year---refinancing. Too often homeowners refinance their home mortgage for all the wrong reasons. I want people to understand that you should usually only refinance your home under the following two circumstances. 1. You are currently in an adjustable rate mortgage that is about to readjust to a higher rate. In this case I would recommend refinancing to a fixed rate mortgage. This way you know your payment will never increase. 2. You are paying more than a 1% higher interest rate than what you could by refinancing to a current lower fixed rate and plan to stay in the home at least 3 more years. In this situation you save money each month because your interest rate is at least 1% lower than what you were paying, however it usually takes at least 2 years of paying on the mortgage to save enough to pay the extra closing costs you incurred by refinancing. The homeowner does not realize (or does not care) that there are several thousand dollars in closing costs that they incur by refinancing. Of course they never pay those costs up front but just roll them into their mortgage balance. Every time they refinance their balance immediately goes up several thousand dollars. You should only do it if you are going to be saving enough money over time to more than cover those costs. Homeowners who frequently refinance usually use bad reasons to justify it. Here are the top bad reasons given to refinance. If the following are your reasons to refinance you are shooting yourself in your financial foot. The far and away leader in bad refinances is to pull out some of your home's equity to pay off other bills like credit cards, auto loans, etc. Your home is not an ATM machine and should not be used to hedge your out of control spending. Credit cards cannot evict you from your home and take it from you because you didn't make the payments. If you roll personal debt into your home you risk losing your home instead of your credit cards. Second place for bad refinances goes to refinance to get a lower monthly payment(unless the interest rate is at least 1% lower). This sounds great but usually the payment is lower only because the loan starts over. If you have been paying on your home for 5 years then refinance to a new 30 year loan of course your payment will be lower because it starts the 30 years over again. But the total you pay out over the now 35 years is more than it would have been had you just stuck to the original 30 year loan. Don't get caught up in the lender wars of refinancing. Get a good fixed mortgage with a good rate and stick to it.

Alex Lengemann is a licensed Real Estate Broker who operates, a local real estate company. You can Ask Alex your real estate or mortgage questions by phone 810-664-1819 or by email ADV

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