Thanks for joining us today for Debt Therapy. I'm your host, Jen Lee, and am ready to discuss refinancing with you today.
The most common loan you hear about refinancing is a mortgage. Back in the 80s, mortgage rates were normally around 15%. But today, the rates are hovering around 3%-4%. It makes it very desirable to refinance.
Length of time is something that many people do not factor in when looking to refinance their mortgage. If you have a mortgage that you have been paying on for 8 years, it is not recommended to refinance to another 30 year loan. You are essentially starting over and will pay more in interest. I would recommend at that point to look at a 15-year or 20-year mortgage. Depending on the rates, your overall payment may not change much, but the amount of interest you pay for the life of the loan will.
It is smart to exam your options side by side so you can see the difference in interest, loan length, total interest paying, and total principal being refinanced. This will allow you to compare for a monthly budget perspective as well as a lifetime perspective.
Also, pay attention to closing costs. There will be closing costs 99% of the time. But it is important to shop around. Some places add in several processing fees and others waive those. Make sure you know what you money is going to.
Another thing that people refinance is a car loan. Many times when purchasing a car, the salesman may convince you to take the current rate because you can refinance later. The problem with that is cars tend to depreciate quickly. If you go to refinance that loan, you may be upside down on the loan and unable to do that.
The other thing about refinancing is if you are having to take our a 7 year loan to purchase, and then refinance a few years in to another 7 year loan to keep it affordable, then you probably need to purchase a less expensive car. Refinancing should save you money when it comes to interest. If you extend the loan, you may be paying more money in interest in the long-run.
The next type of loan that is frequently refinanced is a student loan. Depending on when you borrowed, the rate could be very high for student loans. If you have federal student loans, and refinance to private, you lose all forgiveness and repayment options. Be careful and know that you are ready for it. The only time I recommend switching from federal to private would be if you know for a fact you have a secure job with earning potential to handle it without any forgiveness programs or payment options. If you already have a private loan, securing a lower rate could be a great option.
Another refinancing is with unsecured debt. Switching unsecured to other unsecured isn't a terrible idea especially if you get a special intro rate. You just need to make sure you can pay it off prior to the special rate disappearing.
You should always ask yourself these things:
1) Can you afford the new terms?
2) Does it save you money?
3) Can you pay it?
4) Does it make sense for your income potential?
5) Is there a payoff point/break even point that makes sense?
6) Does it fit into your monthly budget?
Thanks for joining us today!