Realize the Benefits Refinancing Offers

John Valentine

Physician's Money Digest, October31 2003, Volume 10, Issue 20

Individuals who refinance their homes fall into 3 distinct categories: "This is too good to be true" refinancers, panic refinancers, and catch-up refinancers. "This is too good to be true" refinancers refinance when interest rates hit perceived all-time lows and use the money to make major home improvements, consolidate bills, or buy a new car.

Panic refinancers want to wait until interest rates are at their lowest, but often miss out because they wait too long. They eventually refinance when interest rates rise because they don't want to be left behind. Panic refinancers don't necessarily refinance to improve their homes. Instead, it's done as an "interest rate swap." Catch-up refinancers eventually refinance, but only after 18 to 24 months, when rates are substantially higher.

No matter which type of refinancer you are, there are a number of factors you need to examine before refinancing, including the market's current interest rate, the interest rate of your existing mortgage, how long you plan on living in your current home, and whether you need money for other expenses (eg, your daughter's wedding, college tuition, home improvements, credit cards, or the luxury car you've always wanted).

Homeowner Homework

Before you jump on the refinancing bandwagon, check out current interest rates with a variety of lenders. Simply refinancing with your existing bank or lending institution may not yield the best possible rates. When comparing options, make sure you fully understand what you will be charged to refinance your current home loan. If you plan on staying in your home for only another 3 to 4 years, a variable rate of 3% is attractive. Even if interest rates rise to 6%, your average rate will be less than the 30-year fixed rate.

Compare the interest rate you are paying against the current market interest rate and figure out what your total monthly mortgage costs will be in the future. Determine how much you will save after refinancing or what your total monthly costs will be if you plan on recapturing some of the equity you have built up in your home for other purposes. Consult with your advisor on the tax deductibility of the refinanced loan's interest if it's not used to pay for the initial home acquisition amount or major home improvements.

Strategic Refinancing

If you plan on living in your home for a long time, you should still explore the benefits of refinancing. Even though interest rates have recently increased, refinancing is a good option for homeowners. It can be a great way to reduce your monthly payments. If you're considering moving into another home and using your current home as a rental or second residence, refinancing can be used as a strategy for saving money.

If you have outstanding non–tax-deductible, high-interest obligations, you can refinance to consolidate and pay off those debts. Paying off high-interest obligations with a home loan that has a lower, tax-deductible interest rate is worth considering. If you have sufficient equity in your home, you could do a "cash out" refinance and apply that recaptured equity to the non–tax-deductible, high-interest debts.

Professional assistance:

The additional cash you receive from a cash-out refinance can be used for any purpose, including your daughter's wedding, college tuition, home improvements, an extended cruise, or a luxury car. Before you refinance, make sure you consult with your financial advisor, especially for tax advice.

John Valentine specializes in portfolio management and in developing high-net-worth strategies. He is the principal investment advisor at the Valentine Capital Asset Management of San Ramon, Calif. He welcomes questions or comments at 925-275-0200, or visit www.vcrpg.com.