Refinancing: Questions and Answers

I keep hearing that interest rates are really low right now. How can I find out whether refinancing my existing mortgage would really save me money?

You can call us at (801) 924-2300, and we will be happy to help you compare keeping your current loan vs. refinancing. There are several ways to think about it: Would it lower your payment, and by how much? How long would it take to “break even” – where the monthly savings add up to the cost of the refinance?  (All refinance loans have a cost – even so called “no-cost” refis.)

Most refinances are structured so that the cost of the refinance loan is rolled into the loan balance. That means you’re paying interest on the cost of the refinance for the full length of the loan. If the cost of the refinance is $3000 and it is rolled into the loan, and you only make the regular monthly payment, by the time you make your last payment on the loan after 30 years, you will have paid an additional $2,800 in interest on top of the original $3,000 cost of the refinance (based on a 5% interest rate)! That’s why, for most people, the smarter move is to pay at least part of your monthly savings into the mortgage on top of the regular monthly payment until you have brought the loan balance back to where it was before you refinanced. We will explain all your options to you so you can make an informed choice about whether the refinance makes sense for you in your situation.

I have credit card balances with 15% interest rates. Would it make financial sense to refinance my home mortgage to take money out to pay off my credit cards?

Let’s say you have $20,000 total in credit card debt. At 15% interest, you’re paying about $200 per month just to cover the interest –before you pay down even a dime of the principal on your debt.

If you were to refinance your home mortgage to take out enough cash to pay off your $20,000 in credit card debt, the interest you’d be paying for that credit card debt would immediately drop from $200 per month to about $69 per month. If you’re currently paying $500 per month on your credit cards, only $300 of your payment is going toward paying down what you owe. But by refinancing, about $430 of your $500 monthly payment would go directly to paying of the principal you owe on the card.

We’re happy to help you figure all this out based on your specific situation. Just call us at (801) 924-2300.

I have an unusually high tax bill this year and I don’t have the ready funds to pay it all. Would it be better to make monthly payments to the government, or would I be better off refinancing my mortgage to get enough cash out to pay the tax bill?

Mortgage interest rates are much lower than the penalty and interest charges the government requires if you don’t pay your taxes on time. So generally, the answer would be yes, you would be better off doing a cash-out refinance to pay the tax bill. However, when you borrow on your mortgage to pay off another kind of bill, you’re taking a short-term debt and adding it to a long-term debt. You always want to make extra payments on your mortgage to pay off that new debt as soon as possible. (See our answers to the previous 2 questions.

We always want to contribute to your overall financial health and quality of life with the work we do. We will always offer to help clients think through all the pros and cons of any financial decision involving your mortgage. And we’ll also encourage you to seek the advice of your accountant and/or financial planner on non-mortgage-related issues

I am looking to refinance my home loan. Should I choose a 15 or 30-year loan?

The answer depends on your situation. The 30-year loan will have lower payments and will be be easier to obtain and pay off. On the other hand, the 15-year home loan will likely have a lower interest rate, and it will be paid off in half of the time and will save you considerable money over the life of the loan.  Bear in mind that a 15-year loan will have a higher payment than a 30-year loan, so make sure the proposed payment fits into your budget.

I want a low as rate as possible. Should I choose a variable loan (ARM), or a fixed rate loan?

The advantage of a variable (or adjustable) rate loan is that the initial interest rate is lower. However, if interest rates increase, then you could end up paying more. One in-between program would be an “Intermediate” ARM, which is set at a lower fixed rate for 1,3, or 5 years, and becomes variable for the remainder of the loan.

This information is solely advisory and should not be substituted for legal financial or tax advice. Any and all financial decisions and actions should be done through the advice and counsel of a qualified attorney, financial advisor, and/or CPA. We cannot be held responsible for actions you may take without proper financial, legal or tax advice.

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