Home Equity Refinancing Tip in USA Weekend
Picture taken by and copyrighted by Bob Gilbert with all rights reserved. New home in Old Town Katy.
I found this interesting article on USA Weekend written by Robert Powell. The question asked is whether a homeowner should refinance their Home Equity loan when the rate decreases. I always look at the cost to refinance any loan and the payback period of the associated savings. I believe the advice he have this homeowner is sound. When other item to consider is whether in plan to stay in the home or move? .
I might start following Mr. Powell’s answers to homeowners tips.
Here is his answer: Robert Powell answers your personal finance questions. His column runs Tuesdays and Thursdays at usaweekend.com.
Should I refinance to a home equity loan to lower my interest from 5.8% to 4% and payments by one year? I owe about $55,000.
– Mindy Bradley, Amarillo, Texas
Should you accept a 31% rate cut? Absolutely, says Don St. Clair, a certified financial planner in Roseville, Calif., and owner of MortgageNudge. But before you sign, make sure you're comparing apples to apples.
If what you have now is a home equity loan, your remaining term, payment, and current 5.8% rate are likely fixed, says St. Clair. A home equity loan is not the same as a home equity line of credit (HELOC), which are generally offered with a variable rate.
If you go from a fixed rate to a lower, but variable rate, consider how an increase in interest rates might affect your ability to service the debt, says St. Clair.
So if the refinance involves any cost (points, fees and pre-payment penalties), you'll want to know how long it will take to break even, says St. Clair. "No sense incurring upfront costs if you're going to sell, move or otherwise pay off the new loan (or line) before you recover those costs," he says. "All things being equal, take the lower rate. Just make sure you're not trading an apple for a lemon."