By Rodney Davis, CEO, BBB Serving Southeast Florida and the Caribbean
You don’t need me to tell you that times are tough right now. One of the biggest expenses for homeowners is our mortgage payments. Since interest rates are low, a refinance can offer you a few options that may benefit you. A refinance may lower your monthly payment, reduce the amount you pay in interest by lowering the rate and or term of your loan, and enable you to pull cash out of your home’s equity to use to pay off higher interest rate debt (e.g. the average credit card debt incurs 19% interest).
To determine if you might benefit from refinancing your mortgage, get a copy of your last statement and go to: www.BankRate.com/Calculators/Mortgages/Amortization-Calculator.aspx
You will need to know the term of your loan, the interest rate, and the remaining principle. Let’s look at an example:
The monthly payment will also have to include your taxes and home insurance unless you pay those directly. Additionally, there are closing costs associated with a refinance so you will need to be in a position to pay those fees up front.
Since rates are relatively low today, I refinanced with the goal of paying off my mortgage more quickly and reducing the amount of interest paid. Using the same figures from above, and by reducing the new loan to 15 years, the monthly payment slightly increases to $1,153, but over the life of the loan, the homeowner will pay $34,638 in interest compared to $71,011.
Lastly, if you have $8,000 in credit card debt, and you have enough equity in your home, a refinance can allow you to pay off the debt, move the rate from 19% to the term of your new mortgage (e.g. 2.5%) while your overall mortgage payment that now includes the credit card debt is equal to or less than the combined credit card payment/mortgage payment paid previously. Each situation is different and your credit score, the term of the loan, and other factors will impact the interest rate you are able to obtain, but aside from the time to process the request with a mortgage broker, it costs nothing to see if a refinance is beneficial for your goal—lowering monthly payments, paying off credit card debt, or reducing the term and amount of interest paid.
It is important to work with a good mortgage broker and you can obtain quotes from several brokers to compare the rates and closing costs at www.SEFlorida.App.BBB.org/Connect.
One other major expense for a homeowner is insurance. Homeowners insurance and auto insurance are expensive for Floridians. According to www.Insurance.com, Florida comes in at number three for the most expensive homeowner’s insurance only trailing Oklahoma and Kansas.
Similarly, Florida is the fourth most expensive state for auto insurance. It is critical to have quality insurance, but that does not mean you should not shop for a good value. Again, you can go to www.SEFlorida.App.BBB.org/Connect to request quotes.
The Florida Department of Insurance provides a great checklist to use when buying homeowner’s insurance: www.MyFloridacFO.com/Division/Consumers/UnderstandingCoverage/Guides/Documents/HomeownersToolkit.pdf.
BBB tips for buying auto insurance are at www.BBB.org/Article/Tips/14093-BBB-Tip-Auto-Insurance.
Whether your goal is to save money now, save money in the long run, or reduce the amount of money going to interest instead of reducing your debt, these tips can help you accomplish your goal.