Should You Refinance Your Home?

1. Refinancing a home: Pros and cons
by David Bodner, ChFC, CLU, MIBS Refinancing is used frequently to consolidate debt. A
Home mortgage refinancing can be a valuable tool person can take out a new larger loan to pay off their exist-
as homeowners look to save more money each month. ing loan as well as pay off consumer debt such as credit
Extremely low interest rates and the resetting of adjustable cards. Possibly, they can lower their monthly payment and
rate mortgages (ARM) makes home mortgage refinancing eliminate consumer debt at the same time.
a smart choice for many local homeowners. This could be Although it sounds obvious to reduce a monthly mort-
one of the best financial decisions a homeowner makes. gage payment and eliminate debt, homeowners should not
However, he/she needs to make sure they know the facts ignore red flags. They have to ask themselves how they
and do their homework to determine if refinancing is best came to acquire so much consumer debt in the first place.
for long-term financial goals. It is quite common to wipe the consumer debt slate clean
A home mortgage refinance is the process of getting through refinancing only to find oneself drowning in debt
a new home loan. An individual can use the proceeds of in a few years time.
the refinance to pay off their existing loan. Finally, refinancing enables a homeowner to “cash out”
There can be multiple benefits to refinancing. First, a some of the equity in their home. This involves taking out a
refinance can result in a lower monthly mortgage payment larger loan and paying for a large one-time expense such as
due to an improved credit score and/or lower interest rates. a remodeling project, medical bills, or even a wedding.
Second, refinancing can ameliorate a homeowner’s loan Homeowners often refinance to save money each
structure according to their unique needs. month and to reduce consumer debt. The current low
Usually, homeowners will refinance from an ARM to borrowing rates have sparked an interest in refinancing.
a fixed rate mortgage because the ARM is getting quite A general rule of thumb is that a difference of at least 1%
expensive. It is possible to refinance from a fixed rate in interest rates may make a home refinance worthwhile.
mortgage to a more flexible ARM if it fits the individual’s However, interest rates alone should not be the sole deter-
financial needs. Next, refinancing can shorten the mortgage mining factor to refinance.
payoff terms. This can save thousands of dollars in interest The length of time an individual expects to stay in
costs over the years. Brent Lehman (…continued on page 18)
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2. 18 · TOLEDO BUSINESS JOURNAL · JUNE 2009 PERSONAL FINANCE & PLANNING
calculating the break-even analysis. The as a new car or boat. up their consumer debt through unwise
Mortgage more complex calculation of the break-
even analysis may be very different from
Lending requirements are tightening
across the board. The lending industry is
use of their credit cards.
Lehman encourages clients to talk to
the simple method. taking a step back and changing the way several lenders. “Look for a lender who
…Continued from page 17 When should a homeowner refinance it determines creditworthiness. Lehman will give you truthful answers and not
their home is also a factor. If there is their current home mortgage? Brent Leh- added that banks are increasing their stan- just what you want to hear,” he stated.
a possibility of moving within three man, a loan officer at Midwest Mortgage dards and requiring bank and investment Lenders are required to give a Good Faith
to four years, a home refinancing may Investments Ltd., explained that the hom- statements, payroll stubs, and tax returns. Estimate and a Truth in Lending State-
not make sense. Many people do not eowner should ask, “First and foremost, Credit scores are a major factor in de- ment within three days of the refinancing
think of a possible job relocation when does it make sense and will [I] benefit in termining the refinancing interest rate. The application. “It makes sense to have an
refinancing. For people who plan to the long run?” rates start adjusting upwards when credit attorney at the closing” just to make sure
stay in their house at least another five Toledo area residents have above aver- scores are below the 720 range. Veteran’s everything goes smoothly.
years, refinancing generally makes good age consumer debt levels. According to a Administration (VA) and Federal Housing The goal of any home mortgage
financial sense. recent study by Moody.com and Equifax Authority (FHA) loans are not as interest refinancing should be to improve a
The decision to refinance should Inc., Toledo ranks second in Ohio and rate sensitive when refinancing. Job secu- long-term financial situation. There are
include a break-even analysis. How 14th among 208 national metro areas in rity, a credit score above 700, and existing many factors to take into consideration
long will it take to recoup the costs the increase of consumer loan balances home equity are all positive attributes in when refinancing. Individuals should
of refinancing? A simple break-even from 2007 to 2008. Lehman advises clients the eyes of a lender. know why they want to refinance and the
analysis involves dividing the costs of to better manage their personal spending Home mortgage refinancing is not for break-even analysis. Finally, they should
refinancing by the monthly savings. habits when they are considering refi- everyone, so it is very important for an indi- deal with a lender who they can trust and
This is only a rough guide and does not nancing. If no changes are made, then the vidual to do his or her homework. Constant who will give great service throughout
take into account the length of the new homeowner may end up with a high level refinancing can lead to extending the length the process.
or old loan. For this reason, one should of debt in just a few years after refinancing. of a mortgage, delaying the eventual payoff David Bodner is a financial planner
always ask the lender to take into con- Refinancing does not make sense in order of the mortgage. In addition, it provides with Seymour & Associates in Maumee,
sideration the length of the loan when to make another consumer purchase, such homeowners another opportunity to build Ohio.
Study: Long-term care costs outpacing rate of inflation
The cost of long-term care in Ohio is further financial planning challenges for period of time, measured using the Core CPI period of time. Costs in the Cincinnati-
rising at a rate outpacing inflation, putting many in the state. (which excludes food and fuel) reported by Hamilton region have increased 1% a year
significant financial pressure on those in Nationwide, the annual cost for a the US Bureau of Labor Statistics. since 2005.
or near retirement, according to an annual private nursing home room is $74,208, or In the Toledo area, costs rose 3% annu- “Many Ohio residents who had planned
study by Genworth Financial. At the same $203 per day, representing an increase of 4% ally over the past five years. In the largest to tap their hard-earned nest egg to cover
time, the current economic downturn has led annually since 2005. This represents a rate regions in Ohio surveyed, this cost has risen future long-term care costs are finding this
to a decline in home values and investment of growth nearly twice that of the median 4% a year in Columbus and 3% a year in may no longer be a viable option given the
returns for many residents of Ohio, creating annual inflation rate of 2.3% over the same the Cleveland-Akron region over the same (…continued on page 19)
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