Refinancing takes homework
With mortgage rates at historic lows, a lot of people are interested in refinancing their home loans.
When does it make sense to do it? Many financial professionals have suggested a very general rule of thumb that if you can save 1 percentage point off your interest rate, it probably makes sense.
But it’s a more complicated decision than that. Bankrate.com, a consumer-oriented financial Web site, emphasizes that you need to determine your break-even point to make a decision:
“The break-even point is the time it takes to make up in monthly savings what you paid in fees. You calculate it by dividing the mortgage fees by the monthly savings. For example, let’s say you would save $100 a month by refinancing, and the closing costs would be $3,000. Your break-even point is 30 months from now: the $3,000 in fees divided by the $100 a month in savings. …
“In this case, if you expect to continue living in the house for more than 2 1/2 years, you’ll save money in the long run by refinancing. If you plan to sell the house before then, it’s probably best to stick with the mortgage you have.”
Right now, people with good credit scores can get interest rates in the high 4 percent to low 5 percent range, according to the Washington Association of Mortgage Professionals. The group offers these tips for people considering refinancing:
•Be aware of all fees and closing costs. Get them in writing.
•Be sure you understand the terms. Especially if your new mortgage is adjustable, know exactly how the payments program will work.
•Figure out how much your monthly payment will be reduced. Compare the total remaining payments on your existing loan to the total payments on the new loan – plus closing costs and fees.
•Shop around. Always a good idea. When you’ve got an offer, find out how long it’s in effect and then compare to two or three other lenders.
The kids are all right
A lot of people with children find it hard to save for everything they’re supposed to – from retirement to the emergency savings account to college for the kids.
Financial planner Sheryl Garrett says families often set their priorities backward, wanting to do as much as they can to help their kids through college, according to a Gannett news story.
“Parents should realize that college students can borrow money at low interest rates for college and pay it back during the 10 to 30 years after they complete their education. But parents cannot borrow money for food, medicine and a roof over their heads if they are 75 and without adequate retirement savings,” according to the story.
Garrett even advises parents to save for college in Roth individual retirement accounts. That way, if there’s an emergency, you can tap those funds, and if there isn’t, the money’s available for college.