Paycheck Chronicles

Refinancing Questions the Calculators Won't Ask


There are a bjillion places on the internet where you can calculate the financial aspects of refinancing your home mortgage.  While objective data is important, subjective information should be considered as well.  No online calculator is going to do that for you, so you have to do some extra thinking yourself.

Here are the questions that I think you should ask yourself before you refinance:

1.  Is this your current home, or is currently being rented?  There are all sorts of reasons this is important, from the interest rate you can receive to the tax ramifications of refinancing.  Interest rates on investment properties are significantly higher than for primary residences, and they usually also require that you have at least 20% equity in the property.  Also, all of your rental income will not be counted when figuring your qualifications.

2.  Is your income relatively stable, or might it go up or down?  Do you anticipate a promotion, or a move, or a new baby that keeps a parent out of the workforce?  You know that I suggest basing all your financial planning on just one income, especially for military families.

3.  What sort of things might change your ownership plans?  What if your job requires you to  move, or a parent needs care, or the housing market changes dramatically?  Obviously we can not anticipate everything, but asking a few "what if" questions is always a good idea.

4.  What is your savings situation?  Do you have an adequate emergency fund?  Would refinancing use up all your free money, or would it help you build a healthy cushion quickly?  Are you disciplined to save the extra money, or will it do a magical disappearing act into your day-to-day spending?

5.  What are the chances that you will want to obtain a mortgage for a different house in the future?  In underwriting terms, the total debt-to-income ratio is very important.  Refinancing to a shorter term can save you a lot of money over the course of the loan but might make it harder for you to purchase another property in the future.

6.  Do you have extra money that you can put towards the loan right now?  Perhaps you have built up a sizeable savings account, or just received a reenlistment bonus.  Putting a chuck of money into the loan at refinancing can change your monthly payment dramatically, and will have more impact that just paying against the loan principal in the usual way.

7.  What does your gut say?  This is important and often not considered.  Don't trust your gut alone, but do take some time to see how it feels.  Does increasing your payment a bit make you queasy?  Does spending money on closing costs make you feel uncomfortable?  Are you excited about paying off your mortgage faster, or would you rather have a little extra room in your monthly budget?

8.  What does the rest of your life look like right now?  Refinancing is much more complicated than it was just a few short years ago.  My husband and I refinanced our mortgages a few months ago, and it was so much more stressful than in the past.  Add in our location, inability to scan and fax from our home, and it was just an unpleasant process.  It was easier to buy the houses originally than to refinance last year.  If your life is already overburdened, and you are only going to save a few dollars, you might want to consider waiting just a bit.

Interest rates are fantastic right now, and lots of us are considering refinancing our mortgages.  Be sure to look at the big picture and consider all the aspects of refinancing before you jump ahead.  It is a challenging and often expensive process, so be sure that you really want to refinance before you start.


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