Saturday May 27, 2017

Is Refinancing Worth The Higher Closing Costs?

Refinancing is and has long been a popular option for homeowners in a pinch who need money, whether for something necessary or something enjoyable.

Is it an intelligent option though?  You may have heard that refinancing has its price in closing costs, extended mortgage duration, and sometimes in additional fees.

Should you get refinancing or will the closing costs wipe out your savings? The number one question you should ask yourself is whether you need the money.

Do you want to refinance so that you can keep the bank from foreclosing on you, or just because you want to remodel your kitchen?

Are you going to use the money to pay off a medical bill, or are you going to use it to book a cruise?  If you truly do need the money, then refinancing might not be the worst idea, especially if you have good credit.

There are a lot of benefits to refinancing—aside from the obvious choice of paying off your original mortgage, you could use the money to pay off other debts, raising your credit score and eliminating higher interest rates in the process.  You’ll owe the refinance loan interest, but that’s often not nearly as bad.

Other benefits

Other benefits of refinancing include getting a better interest rate on your home loan itself, or fixing an adjustable interest rate which has spiraled out of control.  This can save you a ton of money and also save your home if you were in danger of falling behind on your payments.

Nonetheless, you will pay for refinancing in terms of higher closing costs.  It’ll take you longer to pay off your refinanced mortgage (sometimes decades longer), and if you reduce your equity below 20%, you may be ordered to take out mortgage insurance.  Mortgage insurance can cost you hundreds of dollars every month.

How much higher will your closing costs be if you refinance?  That depends on how high your credit rating is usually.  If it is high enough, the additional closing costs may be modest, but if your credit is very low, your closing costs could tack thousands of dollars onto your mortgage.

There are some things that are priceless in a sense because you need them, yet still cost a lot.  This includes taking care of your health, keeping a roof over your head, and other basic life necessities.

Paying thousands of dollars later may be worth it to save those things now, because going homeless or losing your health can result in a much higher price financially and emotionally. 

On the other hand, is a remodeled kitchen or basement really worth thousands of dollars on top of what you’ll already be paying through the loss of your equity?

Numerous homeowners certainly believed so in the 90s and early Aughts, and refinanced their homes sometimes multiple times to make renovations.

They called this “investing in the value of their home,” thinking it would result in the home’s worth increasing, and that they could then sell it at a higher price later if they desired.  Instead, these homeowners discovered years later that their homes are now worth a lot less than the money they put into them. 

So if you’re going to refinance, do it for the right reasons.  Don’t think that remodeling your house justifies those higher closing costs and other drawbacks.  But if you need the money for survival, then refinancing is worth considering.

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