Refinance

by Scott Bilker

First off, to find out more about my loan analyzing services, simply send me an email with your phone number and the best time to call (click here to send email or call (609) 660-0682). For a very modest fee I can analyze your specific situation so you can make more accurate financing decisions. I've helped provide many people with accurate third party evaluations of their loans, which help save them thousands of dollars! Plus you can speak to a real human, not to some machine or online calculator. :)

You may be thinking of refinancing since interest rates are lower than ever. But with all the costs, application fees, points, etc. how can you be sure you're getting the best deal? Can you be sure that it's better than your current loan?

There are many "rules of thumb" that may or may not apply to your situation, like, "if the new mortgage is at least 2% less than the existing mortgage, it's good to refinance," but that may not always be true. Other variables become significantly important depending on your specific situation. For example, you may want to roll some other debts into a new mortgage or you may be going from a 30-year loan to a 15-year loan.

My philosophy is that the best loan is the cheapest loan. No matter where you "buy" your money it's still the same--little green pieces of paper with pictures. The only thing that separates one loan from another is its cost, that is, the fees compared to other loan options.

Since your situation is probably more complicated than any one online calculator can handle, you have probably asked a few trusted friends their opinions about whether "to refinance or not," or which loan to pick. However, there is much more to it than a simple answer.

Here's a short example of a loan I analyzed for my friend, José.

Refinance Question:
I have a loan for $15,500 at 12.25% for 20 years. I have the opportunity to refinance at 9.5%. The problem is that they want to charge me $1,700 as a processing fee. This will bring the loan amount to $17,200 at 9.5% for 20 years (although I'm only keeping 15,500). Is it worth it?

Summary of Analysis:
There are a few ways to look at your refinance. First, we can say that you're going to borrow $17,200 at 9.5% for 20 years and make payments of $160.33. Of course, you really don't get $17,200, you get $15,500 to pay off the other loan.

So it's like getting a loan of $15,500 and paying $160.33 for 20 years. The corresponding APR for that principal, payment, and time is 11.03%. In the long run you're really refinancing from 12.25% to 11.03%. That seems okay but now let's look at it another way.

With your current loan it takes payments of $173.38 for 20 years to pay off the loan. We can compare that payment amount to the new loan and say that you're going to make the same payment, $173.38, to the $17,200 at 9.5%. In this comparison we're not changing anything about your current position. You're paying the same amounts as you are now but to the new loan.

In this case it takes 64 payments before the 9.5% loan "looks like" the 12.25% loan because of the $1,700 up-front fee. In other words, after 64 payments the unpaid balance of the new loan is the same as it would be after 64th payment under the old loan. Every payment after 64 brings down the true rate of the loan, which after 20 years, will get as low as 11.25%.

Based on how you repay the loan the true rate is between 11.03% and 11.25% at best and you save approximately $3,132 in out-of-pocket costs over 20 years (the difference between the payments). However, you'll really save about $6,120 in true dollars because that WOULD have been your unpaid balance if you continued making the same payments as today, but toward the new loan, since it is now paid off by the 196th payment.

The bottom line, as long as you ARE NOT going to pay off the loan with another refinance, or with cash, before the 64th payment, then it's going to be "better" (cheaper) than your current loan, after the 64th payment.

If you're interested in my helping you uncover the true costs of your loan option, just a email to me at scott@debtsmart.com or call (609) 660-0682.

Scott Bilker is the author of the best-selling books, "Talk Your Way Out of
Credit Card Debt", "Credit Card and Debt Management", and "How to be more Credit
Card and Debt Smart". He is also the Editor and publisher of the FREE DebtSmart®
E-mail Newsletter (http://www.debtsmart.com). Sign up today!

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