You’ve decided to keep your marital home after your divorce or maybe you went out on your own and purchased a new home. Depending on when you purchased your home you may be left with a less than desirable interest rate, or maybe you have some debt hanging over your head you would like to pay off with a home refinance.
How do you know if now’s the time or if refinancing is right for you?
Whatever your reason for wanting to refinance, there are a few things you need to consider before moving forward with this type of transaction.
What is your reason for re-financing?
Many of us who have been through a divorce can state various reasons for wanting to re-finance, such as:
- To remove your ex from the loan.
- Pay off high interest loans.
- To obtain a lower interest rate.
- Take cash out of the equity built up in your home for a vacation or luxury item you could not otherwise afford.
While the first three are valid reasons, the fourth is not and you may be digging a deeper hole of debt by attempting this. In any of the above situations it is important to weigh the pros and cons and make the decision based on the bottom line—leaving your emotions out of the equation.
Fixed or variable?
When determining whether a fixed or variable rate mortgage is best for you there is a very important question you need to ask yourself, “How long do I plan to live in this home?” Your answer can help you determine whether a fixed or variable rate mortgage is best for you. Many divorcees are going through an uncertain time and may not know the answer. Here are a few things to consider when it comes to fixed and variable rate mortgages:
- Adjustable rate or variable mortgages. These typically have an attractively low introductory rate, but buyer beware: variable means variable, so it is subject to change based on the market. In some case you aren’t able to get out prior to the rates rising—leaving many in the unfortunate situation of foreclosure.
- Fixed rate mortgages. These generally come with a higher rate however are “locked in” to that rate, so you know what you are up against from day one, no surprises. If you know the home you are in is where you plan to stay no matter what, a fixed rate mortgage is your best bet.
Points & Penalties
When deciding if a refinance is right for you there are two major factors to consider.
- Points. Points are percentage points of the value of your loan. By paying points you can decrease the interest rate on your loan. To determine if paying points is worth it be sure to calculate the rate you will be receiving and how that stacks up against the up front costs associated with paying points.
- Penalties. The terms and conditions of most loans will put you to sleep however in a transaction this significant reading line by line, awake is imperative. For example some loans come with pre-payment penalties. So if you are looking to refinance your current loan be sure to review the penalties section of your original loan to ensure that you won’t be socked with a prepayment penalty fee for paying off early. Often times these penalties negate the savings you were trying to achieve with the refinance.
Will Refinancing Better your Bottom Line?
The only way you’ll know this is to sit down and play with the numbers. There’s a minimum amount of time you’ll need to stay in your home to break even regardless of whether you choose a variable or fixed rate mortgage
- Calculate. Use a refinancing calculator to help you calculate how much you’ll save by refinancing and how long it’ll take you to recoup your costs.
- The magic number. If you can get a minimum of two percentage point’s difference in your rate, refinancing may be worth it.
If you are not good at crunching numbers or reading legalese consider asking for help. A trusted friend who has been involved in several real estate transactions, real estate agents, and financial experts are a great place to start. When it comes to questions like these most will offer their professional opinion free of charge.
Deciding to refinance is a big step; be sure to do your homework, know your situation, and ask for help if you need it.
Do you have a refinancing nightmare?
The Divorce Coach Says
I’ve just been looking at this myself. I have my primary mortgage which is fixed at a pretty good 4.5%. I also have some debt on a Home Equity Line of Credit which is a variable rate but currently also at 4.5%. I was curious about rolling the HELOC into my mortgage so I could lock in a fixed rate. When I talked to the specialist at my bank I found that by doing this I could lower my interest rate to about 4.25% (not a huge reduction) and my total monthly payment would be about the same as my mortgage payment currently. Sounds good, right? Well, maybe.
The problem is that I would be starting my 30-year term again and the HELOC instead of being paid off in about 11 years would be paid off in 30 years. That means I’d be paying more in interest and it puts me further away from meeting my goal of being debt free by retirement.
The other option would be to shorten the term of the mortgage to 15 years and that really would help me meet my retirement goal. The problem with that though is that it increases my monthly payments by more than I can afford right now. So that’s a no go, too.
So I’ve concluded that at least for now refinancing is not a good option. I do however make an extra payment each year and that takes me much closer to meeting my retirement goal without spending money on points and closing costs.
BTW I’ve heard some experts say that unless you can bring your interest rate down a full percentage point, refinancing isn’t worth it.
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