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Financial Outlook

It seems like an obvious question, however, it is often overlooked.  When considering a refinance, what is the health of your finances?  Homeowners often wait until they are in a difficult position to begin making moves.  That could be too late for lenders and yourself!

Questions You Should be Asking:

  • Are my credit card balances above 30% of the available credit line?  For example, if you have a $5,000 credit card, do you owe more than $1500.00? Do you know what that does to your FICO score
  • Do you have student loans you are making minimum payments on with more than 5 years remaining?
  • Do you have auto loans in terms of 72 or 84 months?  Are payments becoming unmanageable?
  • Is your business running short on cash flow?  Are your receivables running longer than 90 days?  Considering an expensive loan from Kabbage?
  • Are you hearing rumblings or restructuring at work? The potential loss of time and income in the coming quarter or quarters?
  • Are you experiencing “too much month and not enough paycheck?” In short, the question is are you outpacing your income in expenses, bills, and payment?
  • Are you overpaying your single biggest expense?

A financial checkup is designed to give you a “30,000 foot look” at your money.  Too often individuals and families spend their time looking at their finances from the 1st through the 15th and 16th through the 31st! — essentially living in the moment.  It is time to break that cycle once and for all.

It’s Time to Take Action Now

If you fit any of the above scenarios or dozens of other potential financial pitfalls, the time to take action is now, and not wait until the event of the financial situation overwhelms you.

Sit with a professional and talk about your financial situation.  Have an unbiased 3rd party look at your financial picture from a number perspective.  It will be the best smart money move you make!

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Let’s first list them and take a deeper dive:

  • Reason #1: You’re Not Planning on Staying Put (long-term).
  • Reason #3: Long-Term Costs Outweigh Your Savings.

Home mortgage rates are moving due to a number of factors, but they’re still low in comparison to historical trends (historically low). Deciding to refinance while rates are low can potentially save you some money. However, just because the market is in good shape doesn’t mean it’s necessarily the best time to refinance for you personally. “Personally” is the most important word here! Some reasons for this could be that your credit is low or you’re planning on moving out soon. Remember a mortgage has little to do with rates or market trends, it has everything to do with your personal situation.

Reason #1: You’re Not Planning on Staying Put

One of the most important details you need to pay attention to when you’re planning to refinance is the break-even point. This is the amount of time it will take for you to recover the closing costs on the new loan. The break-even point is calculated based on how much you pay in closing costs and what your new interest rate will be.

PLEASE NOTE THIS IS FOR RATE & TERM REFINANCE ONLY!

If you are simply refinancing for terms — i.e. rate and years — then this is important.

Closing costs average between 2% and 5%, so it could take several years for you to get back to even. For example, if you pay $3,000 in closing costs and your payment only drops by $50 a month, it’ll take 60 months before you break even. If you’re planning on moving before the break-even period ends, refinancing probably doesn’t make much sense since you won’t be reaping any significant financial benefits in the long run. This scenario is for hypothetical purposes only!  This is not a real mortgage scenario.  Food for thought!

Reason #2: Your Credit Score Is Lacking

Your credit score plays a major part in determining what type of refinancing rate you’ll qualify for. The higher your score, the better the deal will be. If your credit is less than stellar, you may have trouble finding a lender who’ll be willing to work with you on a refinance. If you are able to qualify for a loan, the rate might not be that great.

However, bear in mind the role that an advisor and fintech can play.  Credit scores fluctuate monthly.  Why? Your credit usage plays a significant role in your credit score.  In essence, it is a snapshot in time.  If you make major payments to credit cards at a certain time of the month, depending on when those cards report to the bureau can raise or decrease your score by an average of 26 points per account! In short, there is a big difference between credit issues and a low score.  A professional will help you sort through this.

Reason #3: Long-Term Costs Outweigh Your Savings

Refinancing doesn’t necessarily guarantee that you’ll save money and in some cases, it could possibly actually work against you. For example, if you’ve already been paying on your existing loan for a while, you’ve probably paid more towards the interest than the principal. If you refinance into a 30-year loan to get a lower payment, you’re effectively going to be paying the interest twice even if it’s at a much lower rate the second time around.

Stop. This is a point again, where your financial goals must come into play.  Now is not the time to worry about the long-term cost of a mortgage if you are swimming in massive credit card, student loan, and personal loan debt.

Refinancing into a 15 or 20-year loan shortens your repayment period but it also means you’ll be paying more every month towards your mortgage. While a higher payment may be affordable now, you need to consider whether it will still be reasonable in the future. Do you have a plan B?

Reason #4: You Want to Tap Into Your Home’s Equity

This one may confuse some.  However, to simply tap into your equity, especially if this is the 2nd, 3rd, or 4th time you have refinanced, there may be an underlying issue.  Refinancing your home to pay off debt, start or fund a business, is a great idea.  However, if you keep coming back to do the same thing over and over again, your financial plan may not be in line with your life!  Equity is great, cash is better.  Leveraging your home is great, but what happens after the refinance is more important.

 

 

Refinance Your Mortgage

Facts, people will refinance for hundreds of different reasons.  Why? Because it should never be a one-size-fits-all solution.  Consider this:

  1. People refinance to save 0.5%.  That makes sense to them.
  2. People refinance to pay off credit card bills.  That makes sense to them.
  3. People refinance to start a business.  That makes sense to them.
  4. People refinance to pay for college, for themselves or their children. That makes sense to them.

What makes sense to you?  Let’s talk about maybe the most overlooked reason to actually save money on your mortgage.

Not All Refinances are Created Equal!

You want to save the overall cost of what will be the biggest expense of your life: your mortgage.  So you are doing it for the interest rate then, right?  No, actually it is about the payment.  The single most important factor in the mortgage.

Basic math:  You are 2 years into a 30-year mortgage.  Your monthly payment is $1,122.00 per month.  So what will your mortgage cost you?  Well, you have 334 payments left at $1,122.00.  That equals $376,992.

Basic math on the refinance: You refinance your home by removing 8 years.  Let’s say you keep the same payment since rates are so low.  What would 8 years mean in real money, cash in your bank account?  8 x 12 = 96 payments.  96 x $1,122.00 = $107,712.

That is real money!  Imagine saving $107,712.00.  That has nothing to do with an interest rate.  That is real money staying in your bank account.

Not all refinances are created equal.  There are hundreds of reasons.  If saving over $100,000.00 is a good reason for you, then get started today!