Editor's note: This posting has been getting high readership. I've added a new link for more perspective from SmartMoney.com called "When Refinancing Doesn't Make Sense." - Julia
JP Morgan Chase Bank surprised me, recently, with an invitation in the mail to refinance my home mortgage loan. The proposal would reduce my interest rate of 6.1 percent set in 2008 to somewhere around 5 percent. The new rate would cut my monthly payment by just over $100 or about $1,200 a year.
Initially, I thought this would be a good idea since I'm semi-retired and looking for ways to reduce my household expenses. Financial planning experts have long recommended that those of us at or near retirement should be paying off as much debt as possible and getting out from under mortgage costs and interest expense. ( Erci Schurenberg writing at moneywatch.com explains why he paid off his mortgage after weighing the pros and cons.)
For newly widowed or divorced 60-and-single women, reducing debt should be a No. 1 consideration. That's because as your single income drops into a lower tax bracket, writing off loan interest costs on your federal tax return will be less important. Meanwhile, bank interest on the loan takes a big bite out of your financial flexibility. But upon my return from vacation, I changed my mind about the Chase deal. Here's why.
With a monthly savings of just over $100 on the refi, it would take more than three years (at $1,200 a year) for me to recoup the steep $4,000-plus in closing costs and refi fees that Chase wanted to charge me for doing me this big favor. Three years is a long time when you get to be over 60.
In three years a lot things can happen. My 96-year-old mother could die giving me the option of completely paying off my mortgage loan out of my inheritance from her. Or I could decide to sell my big house in the woods with all of its upkeep costs and property taxes and opt for something smaller and less expensive in town. Or I could get sick and need the $4,000 for medical expenses.
So while I like the idea of $100 in monthly "savings" in my checking account, I'm kidding myself that with all the unknowns this would be a good idea....especially considering what Chase wants to charge for the refi. So no thank you.
Lots of offers in the mail
The funny thing is that in the pile of mail that accumulated while I was gone, I found four more mortgage refi offers from various banks and other entities. All emphasized the reduced monthly payment. They must realize that there's a lot of money to be made from people like me who still have real estate equity and who haven't ever missed a mortgage loan payment but who want to reduce household expenses. But $100 a month is just not a big enough incentive for me. So before considering a refi, the experts suggest these steps.
1. Educate yourself, says Jane Pulliam Weston writing at http://www.moneycentral.com/. "Educate yourself. Read about how the refinancing process works, get a copy of your credit report and score so you know how lenders view you, and start shopping for rates and terms.
2. If you think a refi might be a good thing for you, start your quest with your current lender, who has an incentive to try to keep you as a customer. Don't stop there, however, says Weston. There are 7,000 lenders out there. Get at least four comparable proposals.
3. Make sure that you understand the costs built into a refi. Will you pay those costs off in cash or fold them into a new loan that gets pushed further into the future? There are plenty of calculators on line to help you do the math. Web sites such as bankrate.com can give you a good idea of what the costs are for refinancing to a variety of different loans.
4. Know your credit score. Chase seemed to be happy just knowing that I had income from Social Security.
5. Read the fine print. The mortgage industry already has a tarnished reputation for using bait and switch tactics with borrowers during the real estate boom. Avoid predatory lenders by sticking with brick and mortar operations with real people to talk to. If you do decided to refi make sure there are no pre-payment penalties, if you pay off the loan early.
A good place to start is at http://www.homebuyinginstitute.com/. Click on refinance for a laundry basket full of questions and answers on refi programs in 2011. Basic rule of thumb: The amount you save must exceed the amount you pay in closing costs. How long will it take you to get to that break even point on the savings...one year, or in my case three years? Another turn off for me was the $400 refi processing fee that immediately showed up on my credit card. Sorry Chase, I'm keeping my money.