Refinancing Rethought How to Know When Refinancing Is a Bad Idea A Biweekly Mortgage & Loan Service A Simple-Math Approach to Mortgage Management www.usequityadvantage.com
The Trouble With Mortgages Why Refinancing Doesn’t Always Make Sense
Nothing holds us down like a monthly payment. Credit cards, auto loans, mortgages — the bills come in and the money goes out. It’s hard to get ahead that way, which is why people look for methods for reducing their debt and shrinking their monthly obligations. Mortgages are particularly oppressive loans because they last for so long, often several decades. Making longterm plans for the future isn’t easy with what feels like a never-ending commitment. Perhaps that’s why so many homeowners decide to refinance. Refinancing is wildly popular in the United States. In fact, most analysts say it’s too popular, since it doesn’t always work out in the homeowner’s favor. The idea is to change the terms on a mortgage — a longer loan with a lower monthly payment, for example, or maybe the opposite: a larger payment in exchange for an earlier payoff date and/or lower interest rate. But it doesn’t always pay off. It’s all too tempting to stand around the water cooler at work or stop by the neighborhood block party and hear your friends or coworkers bragging about all the money they saved by refinancing. It sounds nice, and that leads a lot of people to rush into refinancing. But while refinancing is a great idea in some situations, it can just as often lead to unexpected financial consequences. When dealing with any kind of debt, the best rule of thumb is to have as little of it as possible and to get rid of it as soon as you can. Refinancing only makes sense when it helps you accomplish that goal. It’s ultimately a numbers game. By taking stock of your financial situation, the terms of your existing home loan, and how those terms might change, you can make an educated decision about whether refinancing makes mathematical sense for you and your family. In the pages ahead, we’ll walk you through refinancing’s basics, tell you how recognize the break-even point, and reveal the most common scenarios in which refinancing is a dangerous idea. But however the math works out in your situation, there are always alternatives, and at the end of this paper, we’ll look at ways in which you can shrink your mortgage debt without increasing your payments or refinancing a dime.
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Refinancing 101: The Basics
A house is the most expensive purchase most people will make in their lifetime. They cost tens or hundreds of thousands of dollars (sometimes millions), and most people just don’t have that kind of cash on hand. So, like they do with college, cars and other major purchases, they take out a loan. We tend to think of home ownership as the cornerstone of the American Dream, but the idea that most people could own their home is actually fairly recent. In the early 20th Century, only a minority of Americans were homeowners. Most simply didn’t have enough money to buy one, and any loan would have been too large. It wasn’t until the 1930s that U.S. banks introduced the mortgage, a special kind of loan in which the house itself serves as collateral. The basic concept of a mortgage is simple: a bank or lender loans you a substantial sum of money (usually 80% of the home’s price). In exchange, you agree to pay the sum back over a set period of time — plus interest. Because the house serves as collateral, if you fail to make your payments, the bank can reclaim the property and kick you out at the same time through an extremely unpleasant legal process called foreclosure. But even for people who never face foreclosure, monthly mortgage payments can be a real struggle. That’s why many look for ways to reduce their monthly obligations. In some cases, it’s possible to negotiate new terms for a mortgage, most commonly accomplished through refinancing. When you refinance, you trade out your original mortgage for an entirely new one. Your new bank/lender essentially pays off the old loan, and in return you agree to enter into a new mortgage with the new lender (which can actually be the same bank you used the first time, a new bank, or a non-banking entity that specializes in mortgage lending). The new mortgage usually comes with a new interest rate, payment term, and/or balance. For example, you might pay less every month but for a longer period of time. It’s a tradeoff. And you might also be asked to pay all of the closing costs up-front at the time of refinancing. People usually refinance to take advantage of low interest rates or the equity they’ve accrued in their home. But it isn’t as simple as that, and homeowners too often rush into refinancing when it isn’t in their best financial interest. In the pages ahead, we’ll look at when refinancing makes sense, when it doesn’t, and how to tell the difference.
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Guidelines for Refinancing Decision making is a process, and it helps to have a strategy. That’s especially true when you’re deciding whether to refinance. Any decision affecting your mortgage is an important one, and you want to make sure you take the course of action that financially empowers you and your family the most, taking into account both the short- and long-term. Below, we’ve put together a few important questions you should always ask yourself before refinancing. Later in this paper, we’ll look at reasons why some people should not refinance their mortgage. Your answers here will help you determine whether you’re one of those people.
Why Are You Refinancing? Never do something without knowing why — especially where your finances are concerned. Why are you refinancing? Are you worried about the amount you’re paying each month now? Or is the long life of your loan a bigger concern? Did you take out your original mortgage when interest rates were high? Do you just happen to have a surplus in the bank right now and thought it might be a good idea to refinance while you can? Really think about it and ask yourself why you’re refinancing.
What Are Your Goals? Once you know the “why,” decide exactly what it is you want to get out of your decision to refinance. Is it your goal to reduce your monthly mortgage payment? If so, by how much? Are you only concerned about your current interest rate? In that case, decide how much you would need to save in interest to make refinancing worth your while. Do you want to pay off your loan and get that debt out of your life as soon as possible? All of these and more are worthwhile goals, but refinancing isn’t the right answer for all of them. Clarifying your goals now will help you make the right decisions as we move forward.
Is It Your First Time? Have you refinanced a mortgage for the same property before? Most financial experts advise against financing more than once over the life of a loan. If you’re considering a second go-round, you’re probably further along in your loan’s term and there may be other, better options for beating that debt.
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What Does the World Look Like? It might seem like an odd question to ask yourself, but it’s a good idea to size up the state of national and global affairs any time you take on a new financial endeavor. Is the economy shaky? How’s the housing market? What are interest rates like now and are they likely to change any time soon? You can learn a lot in a short amount of time by tuning in to a business news network, using online financial news outlets, or talking to a financial planner.
Checked Your Credit Lately? It’s a good idea to run a credit check at least once a year anyway, but that’s an absolute must-do when you’re refinancing. Your lender will want one when it comes time to negotiate a new loan, but you need to know your situation for yourself before that. Knowing what your credit report shows will help you decide if refinancing is the right course of action. We’ll talk more about the relationship between refinancing and your credit score in the pages ahead.
How Much Do You Have in Your Bank? Refinancing isn’t a “Get Out of Jail Free” card. Certain upfront costs are sometimes required. But beyond that, you need to get a good sense of your financial standing. Sit down with your family and chart out your account balances, your current earnings, your total debt, and your foreseeable income/expenses for the future.
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Rethinking Refinancing 10 Times When It’s NOT A Good Idea There’s a reason refinancing is so popular. It can really work out to some people’s advantage! But don’t let its trendiness trick you into refinancing when it doesn’t make sense for you. Knowing when it is a good idea to refinance is tougher than knowing when it isn’t. So to get things started, we’ll walk you through ten of the most common circumstances in which refinancing is definitely a bad idea. You might be surprised to find yourself in one of them, but don’t fret if you do. There are still ways you can beat banks at their own game and come out on top of your debt.
When Interest Rates Are High Interest rates change over time. Just as it’s better to buy stock when prices are low, it’s better to refinance during periods with lower interest rates, too. You’ll likely refinance no more than once over the life of your loan, so you want to wait until the time is right. Remember that refinancing isn’t a cost-free proposition. It requires time and expense (sometimes substantial), so it has to be worth your while. Sometimes, even a lower interest rate isn’t enough. A few decimal points don’t mean much in the grand scheme of things. Most experts recommend a reduction of at least 2% in your interest rate in order to justify refinancing.
When the Effective Interest Rate and/or APR are Unfavorable An advertised interest rate isn’t always the same as your loan’s “Annual Percentage Rate” (APR) or its “Effective Interest Rate”. Various institutions and jurisdictions use these terms differently, but the important thing for you to understand is the advertised interest rate doesn’t always include things like compounded interest, front-end fees and other charges associated with your interest rate. Because lender fees and compounded interest are part of what you’ll have to pay over the life of your loan, it’s important that you make them a part of your equation now. You should ask your prospective lender what your new loan’s effective interest rate would be. Also find out exactly how they define “APR” and “Effective Interest Rate” — and what’s included in either of those. US law dictates, to some extent, how “APR” is calculated. But “Effective Interest Rate” is less strictly regulated, so be sure your lender is painting the whole picture. At the end of the day, a good rule of thumb is to take all of your compounded interest and fees into account when comparing interest rates, and don’t consider refinancing unless you’d save at least 2%.
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Most experts recommend a reduction of at least 2% in your interest rate in order to justify refinancing.
When You Plan to Sell the House Sooner Than Later It’s tempting to think of refinancing as a way to get quick, short-term benefits (e.g. lower monthly payments), but it really isn’t worth it if you plan to sell your house within the next few years. That’s because the amount you’ll save each month won’t add up to enough in just a few years to offset the costs of refinancing. So before you sign up for a new mortgage, make sure you and your house are in it for the long haul.
When Your House Isn’t a Home (Because It’s Just an Investment) It’s been said that home is where the heart is, but a house is just a house. Not everyone buys real estate to fulfill The American Dream. Sometimes it’s just a good investment, whether you’re renting to tenants, “flipping” an older house, or simply holding onto property until the markets change. But banks and lenders look at investment property differently than primary residences. Many are unlikely or even unwilling to negotiate a refinance for an investment home, and when they do, it’s not nearly as easy. Most lenders impose significantly higher upfront costs, more onerous credit requirements, and less favorable terms, and are only willing to refinance a smaller percentage of your loan. Accordingly, it rarely works out to the property owner’s advantage.
When You Have Less Than 20% Equity in Your Home When you first start making mortgage payments, most of those checks are applied toward interest fees rather than principal. But as time goes on, that ratio begins to change, and you’ll start paying off a larger portion of your principal. Most experts advise waiting until your ownership interest (or the “equity”) in your house — that is, the amount you’ve actually paid for it, not counting interest payments or lender fees — is at least 20% of the purchase price. You can also achieve 20% equity if the market value of your house sufficiently exceeds what you paid for it. In other words, you should only seek to refinance a maximum of 80% of your home’s current market value. Trying to refinance too early, when most of your payments have gone toward interest, is like starting all over again. You’ll be right back in the beginning of a long-term loan, and you’ll end up paying even more toward interest in the long run. Besides, lenders won’t offer you their best refinancing terms if your equity is less than 20%.
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Lenders won’t offer you their best refinancing terms if your equity is less than 20%.
When You’re Relatively Close to Paying Off Your Mortgage Anyway Conversely, it’s also a bad idea to refinance when you have a lot of equity and your loan is nearing the end of its life. You may very well end up extending the loan, meaning you’ll be making monthly payments for longer. Even if they’re smaller payments, the savings won’t be enough to make up for the additional interest you’ll pay. When it comes to debt, the faster you get it out of your life, the better. Don’t make the road to freedom any longer than it needs to be.
When the New Mortgage Terms Nullify The Benefits of Refinancing Perhaps the three most important words in mortgaging are “all things considered.” It’s easy to make refinancing look like a good idea. Some terms will be more attractive than others, and a lender trying to sell you on a new loan will want to focus on those. But remember there’s a reason they want your business! Loan life, interest rate, closing costs, monthly payments, and lender fees are all important. A lower monthly rate can still cost you more in interest over time – sometimes so much more that it’s not worth it. Weigh each new term equally so you don’t saddle yourself with more debt than you can handle..
When You Have Black Spots on Your Credit Report Refinancing is a delicate balance even for people with impeccable credit. If your FICO report is less than pristine, lenders simply aren’t going to offer the most advantageous terms on a new mortgage — and without those best-available terms, refinancing won’t work out in your favor.
When Your Current Lender Charges a Big Break-Off Fee When it comes to refinancing fees, it’s not just the new lender you have to worry about. Your original mortgage might carry significant break-off fees (a financial penalty for ending the original mortgage early). Those can be large enough to discount whatever you might have saved by refinancing otherwise.
When You Don’t Have Thousands of Dollars in Spare Change Closing costs can be expensive — often mounting to several thousand dollars — and that doesn’t come out of thin air. One of the great conundrums of refinancing is that most people do it to save money, but you have to spend money first for that to happen. For homeowners with a nice cushion in their savings account, that can be a worthwhile investment (provided refinancing makes sense by every other measure), but if paying those upfront costs will impose a short-term financial hardship, refinancing is a bad idea.
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The Biweekly Loan Strategy A Commonsense, Simple-Math Alternative to Refinancing If refinancing isn’t right for you, you’re not alone. Favorable terms that justify the cost of refinancing are hard to come by, and even if you find them, most people don’t have a substantial surplus on hand to cover the closing costs and other fees. But refinancing isn’t the only option. There are other strategies that shorten the life of a loan while also reducing the amount of interest paid over time. Aggressively paying off the loan is one such option, of course, but that’s a not realistic course of action for most homeowners. Another alternative is a Biweekly Loan Payment Plan, a particularly attractive option because it doesn’t add a dollar to the amount borrowers pay on the mortgage every month. A Biweekly Loan Payment Plan is a novel approach to debt elimination that simply involves dividing a monthly payment in half and paying it every two weeks instead. It’s an idea so simple and mathematically sensible that it’s almost surprising it hasn’t always worked that way. But as refinancing is increasingly acknowledged in the media as over-popular and often unwise, more and more people are turning to a Biweekly Loan Payment Plan. Here’s how it works. Imagine your monthly mortgage payment is $1,200. Instead of paying $1,200 at the end of every month, you pay $600 once every two weeks instead. How can that make a difference? Actually, it’s just good clean math:
Every time you make a payment, there’s less principal against which the bank can charge interest. When you make half-payments every two weeks (instead of one full payment a month), your principal grows incrementally smaller twice a month instead of just once. Accordingly, interest charges start shrinking almost immediately. Because there are 52 weeks in a year but only 12 months, paying biweekly will result in 26 payments (52 / 2) instead of 24 (12 x 2). Technically, you’re making an extra month’s worth of payments, but because it’s spread out biweekly over the course of a whole year, you never feel the sting. You’re still paying the very same amount every month, but this way, you get more mileage out of your money. Here’s the only catch: you have to be extremely disciplined about making your payments biweekly every single time, without fail. You also have to call the bank after each biweekly payment and make sure they’re applying it to your principal and not to future payments (they’ll often do the latter by default, which is considerably less helpful to your mission).
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Of course, most people simply don’t have the time or dedication to see a strategy like that through on their own. Many try with the best of intentions but end up stretching two weeks into three, and so on. Within a month or two, they’re right back to making month-to-month payments again, which won’t get them anywhere fast. When it comes to any kind of debt, the best strategy is to put it behind you as quickly as possible. But true freedom from your mortgage requires a bold decision to do what it takes, especially when refinancing isn’t practical. Fortunately, loan payment plan service providers like US Equity Advantage have simple, customizable plans that get people on a Biweekly Loan Payment Plan program and keep them there until their mortgage disappears and they own 100% equity in their home. US Equity Advantage’s leading loan payment service is AutoPayPlus™, which makes homeowner’s biweekly mortgage payments for them on a regular schedule and then follows up with the bank/lender after each payment to ensure that the funds are applied toward principal rather than future payments. Once a borrower signs up with AutoPayPlus, they can take their mind off their debt, knowing that it’s steadily being paid off with an ever-shrinking interest and balance. And the program’s PaymentPlus™ Guarantee makes sure the consumer never faces a penalty for missed or late payments.
“When you pay a half a payment every two weeks, keep in mind that there are 26 two-week periods in a year. You’re paying 26 half payments. Twenty-six halves equal 13 wholes. You’re paying an extra payment each year. That’s why your [loan] pays off eight years early.” – Dave Ramsey, “The Dave Ramsey Show” A one-time fee of $399 gives consumers lifetime membership in the AutoPayPlus program for use with an unlimited number of loans, whether it’s a mortgage, student loan, credit card, etc. It’s even available for making utility payments and other non-interest-accruing obligations. And because US Equity Advantage doesn’t require an upfront payment, the $399 can be deducted over time from the initial payments made toward your mortgage’s principal. It’s an incredibly sensible way to expedite your mortgage payoff without refinancing a dime.
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Unlike some other do-it-yourself methods, AutoPayPlus offers: •
Faster payoff for your entire mortgage
Huge interest savings (many homeowners literally save tens of thousands of dollars in total interest accrued)
Every payment submitted on time — guaranteed
Consistent follow-through with the lender/bank to make sure they’re putting your payments where they count
Access to a USEA loan representative for advice
Multilingual customer service
Cancellation at any time with no fee
Customizable payment plans to match your budget and needs
AutoPayPlus is an easy way to put the Biweekly Loan Strategy to work for you. Biweekly debt elimination is a proven approach that has been embraced by everyone from Dave Ramsey and Clark Howard to David Bach and Suze Orman. Stop paying untold thousands in interest charges. Take ownership of your own home and decide to eliminate your mortgage once and for all. Enroll in AutoPayPlus and start securing your own financial future today.
Living in a house you own… with total freedom from debt… that’s the real American Dream.
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Rethinking Refinancing There’s More Than One Way to Be Free Refinancing is all the rage, but what’s popular isn’t always what’s smart. It all depends on your finances, and everyone’s situation is unique. Sometimes refinancing works out in the homeowner’s favor and sometimes it doesn’t. But in any scenario, it’s always a wise strategy to get rid of debt A.S.A.P. The truth is, until your mortgage is paid off, you don’t own your house — the bank does. And to some extent, they own your financial freedom too, because those monthly payments and interest charges aren’t going away. But it is possible to beat the banks at their own game. A Biweekly Loan Payment Plan is a straightforward concept, but its simplicity is what makes it work so well. With just a little bit of clever calendar-setting, this effective strategy puts the rules of basic math to work in your favor. It empowers you to change your life without changing your lifestyle. When you sign up for AutoPayPlus from US Equity Advantage, you take that critical first step toward the real American Dream. AutoPayPlus does all the rest, managing your Biweekly Loan Payment so that you never miss a payment and never get off track. All you have to do is split the payment you’re already making in half.
Who knew that simple math could set you free?
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About US Equity Advantage Founded in Orlando, Fla. in 2003, US Equity Advantage (USEA) is the industry leader in biweekly and early loan payoff services, from home mortgage and student loans to credit cards, automobiles, and more. USEA’s customers enroll as lifelong members in order to strategically eliminate an unlimited number of loans or other debts. Members receive superior service with a flexible, customizable debt payment plan that can dramatically reduce interest charges and rapidly pay down principal for faster debt elimination. US Equity Advantage is the exclusive provider of the life-changing AutoPayPlus™ service, which administers members’ biweekly loan payments for them, guaranteeing that they never miss a payment or get off track. To date, USEA has safely and securely transmitted more than $700 million on behalf of its members. The company is committed to helping consumers reduce their debt, save for the future, and reach their financial objectives. To date, USEA has worked with hundreds of thousands of members to do just that. To try US Equity’s commonsense, simple-math approach, sample the USEA Biweekly Loan Calculator for free online. For additional information, visit www.usequityadvantage.com, call 800.894.5000, or find USEA on Facebook or Twitter (@AccelerateLoans).
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“Eight years” is offered only as an example. Every situation is unique, and timeframes and results vary.
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Published on May 21, 2014
Nothing holds us down like a monthly payment. Credit cards, auto loans, mortgages — the bills come in and the money goes out. It’s hard to g...