OK, this is one of my favorite questions. The reason I like it so much is that it gives me a chance to "preach" about the way the world should work (according to Bob), at least about how property ownership should work.
Refinancing a home is a serious decision, not to be taken lightly or often. Our goal should be to get the home paid off, and refinancing can both help and hinder this process. In my opinion the best and most valid reason for refinancing a home loan is to reduce the total interest paid and shorten the time of the loan. A good example of this is to refinance into a 15 year fixed rate loan, during a time when interest rates have fallen. If you are coming from a 30 year loan this will increase the monthly payment (many times not your immediate goal) but "wow" the end goal of a paid off loan will really be advanced. What a great plan if you can do it.
More commonly though, the move from a 30 year term to a 15 year term, is just not palatable. In this case the refinancing may be more of a monthly cash flow move than a loan term adjustment. As interest rates decline there is real incentive to change the loan to capture the new and lower rates (thereby saving monthly payment costs). All situations are different, but on average you will need to achieve at least a 1% point reduction in order to have things make sense. Why? - Loan costs, that why. A refinance is not free, it may be presented as free or no cost by some, but in reality the costs are either upfront or are buried in longer terms or increasing the balance on the loan. Fees are also incurred with the title change, re-recording of the trust deed, escrow fees, notary fees, and other fees that I have left out. Just remember - loans are not free - people get paid from somewhere. Most calculations will show that the costs to refinance are not recovered until about 4 years of reduced interest rate payments. That usually means break even is about 4 year down the road from the refinance.
I see many instances where the income of a home owner changes so drastically that lowering the monthly payments becomes an immediate necessity. OK, I can buy into that. If conditions require it, then a refinance may be in order.
Now here is where I start "preaching" - If borrowers are refinancing in order to reduce payments and use the extra money to buy cars or "toys", then I have real heartburn. Our homes are not a source of funds for us to siphon off - they are where we live, where we raise our families, and where we can feel safe and secure. The mental security of a "paid off" home is not to be underestimated. The security and the peace of mind are awesome.
About the Author: Bob Foust is the chief executive for the FOUST Team at C21 Discovery; one of the top-selling real estate teams in Southern California. He specializes in Orange and Los Angeles Counties and operates one of the area's most informative real estate websites. To contact him or learn more about real estate in Orange County, please visit www.FOUSTonline.com.
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