Michael Emilio

This is part two of a series where we’ll be looking at the real estate-related rules in Money Magazine’s “25 Rules To Grow Rich By”. We’ll be taking these rules one-by-one and going in-depth as to whether it’s a rule “to grow rich by” or not. Take a look at the rules we’ve covered at the 25 Rules list.

Rule 2: It’s worth refinancing your mortgage when you can cut your interest rate by at least one point.

I agree with the premise of this rule - it’s usually a good idea to refinance your mortgage loan if you have a chance to cut interest. Especially if you’re early in the life of the loan a 1% drop in your interest really adds up over the course of the loan.

Did you know that the overall percentage of the average homeowner’s income that goes to pay their mortgage has risen 12.6% from ten years ago? That can leave many people scrambling for some sort of relief - a refinance may be a way to do so.

The Reasons Why People Refinance

If you’re looking to refinance, there are many other reasons why you might be considering doing so. For example, you might be under an adjustable rate mortgage (ARM) - which I usually do not recommend for homeowners - and switch over to a fixed rate mortage. You might want to reduce your monthly debt load by rolling your unsecured debt into your mortgage as a temporary fix to your credit situation. You may want to refinance your mortgage into a shorter term - this allows you to pay off your loan faster and build your equity quicker. For example, you might want to take your 30 year mortgage and drop it down to a 20 year loan or even a 15 year loan.

By dropping your loan in terms of total years, you’re really getting a handle on your mortgage. Dropping your mortgage down by a percentage point may often not make a very big difference in the long run in the total mortgage interest you’ll pay in general. But if you get a short term mortgage, especially combined with the lower interest, this will really make a big dent in the interest you’ll be paying over the life of the loan.

What You Need to Know About Mortgage Refinance

There are some hidden costs you need to be aware of when refinancing your mortgage. You’ll have to pay lender fees, which can include points, origination, credit report, application, and appraisal. You may have to pay third-party fees - these vary by state and mortgage company and can include title exam, title insurance, closing, and recording. These closing costs can range from 2% to 3% of your loan amount.

To put it blunty, if you make a mortgage refinance decision, you do it for the long term. It must benefit you over the long haul - it must make sense in this future view context! If you think you might be moving relatively soon, then just stop thinking about refinancing your mortgage. Be aware of what’s out there and don’t get suckered into many of these no cost refinance advertisements you may see on television and get into a bad mortgage refinance decision that can cost you money, time, and major headaches down the line.

As for the topic of refinancing your home to pay off credit card debt, I’d recommend you stay away from this course of action for the most part. Statistics show that more than 85% of people who refinanced to pay off their credit card debt return to the same level of credit card indebtedness within 2 years. Don’t fall into that credit card debt cycle.

This is just such a complex and important subject it’s very hard to recommend any course of action as a blanket path for everyone to take in this situation. You really need to take into account your particular situation, learn what you can about the refinancing process, get yourself a reputable professional that can assist you and then it’s time for you to make your decision.

Revised Rule #2: Refinancing your mortgage is a viable solution if you focus on the long-term and are able to save yourself money in the way that makes sense to you.

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