Looking for Cash? Have You Considered Refinancing?

Refinancing: If it was just a simple yes/no question!

Reflecting on Refinancing

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Managing day to day finances is one thing but planning for our financial well-being in 30 or 40 or more years is even more complex. When faced with a decision, such as refinancing a home mortgage loan, we need to consider both today's financial situation as well as what will benefit our financial situation when we retire.

Our homes are important to us in many ways – they provide shelter, we enjoy making them "our own" with decorating, gardening, and home improvements, and they are often a source of "forced" saving for retirement. In 2002, (according to the US Census Bureau) home equity represented over 40% of households' net worth. For some people, home equity is an even larger percent of their net worth; for example Black and Hispanic households – on the average – have about 60% of their net worth in their home equity.

Of course, if you plan on your home equity as part of your retirement income, then you do need to be able to access this equity. This typically involves selling your home and finding a less expensive housing option. (Reverse mortgages are another option in some cases.) This can cause a conflict because often people find they want to age in their homes and not sell them. Thus, the term "house rich, cash poor!" Just one more thing to consider when planning for retirement!

Back to the decision process for refinancing a home – when given a choice, do you decide to refinance for a 30 year or shorter duration loan?

One reader sent in this response,

You may not be getting as much of a tax break for your mortgage interest as you think. Take a look at your 2009 tax return. Did you itemize or take the standard deduction? If you took the standard deduction, you're getting no tax advantage from your mortgage interest. If you itemized, calculate what your itemized deductions would be with the new, lower mortgage interest amount if you refinanced. If your itemized deductions would be less than the standard deduction, you won't be losing much of a tax break by refinancing. But don't let the "tax tail" wag the "mortgage dog." It should be just one of the things that impact your decision to refinance or not.

When thinking about this decision, it's also useful to think about what would you do if you took the 30 year loan and had extra cash now? Would you be able to use it to pay down higher interest loans such as credit card debt? If you did this, would you just spend more and build up the debt again?

Would you be able to invest the extra cash and earn higher returns over many years? Well, this is when the crystal ball that I've misplaced would be useful!

However, as cheap as 4.625% (for a 30 year loan) is for borrowing money, you do still have to pay interest on this loan and the interest adds up. This is a known fact rather than a projection of "what might be."

I've talked to other people trying to make this decision, and interesting enough, the desire to have the home mortgage paid off when retired seems very important. Does this make economic sense? I'm not sure it does when you consider the opportunity cost of the dollars; borrowing money at 4.5% for a 20 year loan is very cheap when considering historical interest rates. But, we need to be comfortable with our financial decisions and for many of us paying off our loans goes a long way to making us comfortable.

Ultimately this is a personal decision. Consider your financial goals and values, talk about it with your spouse/partner, and then move forward. Even if it is a hard decision, with home interest rates at these low levels, it is worth the time and energy to consider whether refinancing your home loan – and at what terms – makes sense for you now.

Click on my name below to share your thoughts about this. What factors are important to you when making a decision like this?

Home mortgage rates are AMAZINGLY low right now! According to Frank Nothaft, vice president and chief economist, Freddie Mac , "Fixed-rate mortgages continued to hover at 50-year lows, .... Compared to the recent peak in 30-year fixed interest rates 13 months ago (week of June 11, 2009), current rates are a full percentage point lower. With today's rates, homebuyers would save about $1,500 in payments each year on a $200,000 loan compared to rates last June."

So, how low is low? According to Bankrate.com's July 21, 2010 weekly national survey of large lenders the national average for a 30-year fixed rate home mortgage loan is 4.74%! (How many of you remember home loans for 18% in the early '80s?)

With rates like this many people may be thinking about refinancing their current home mortgage. If you're one of these, take time to read Looking for Cash? Have You Considered Refinancing? – a Plan Well, Retire Well Blog post from October. If you decide to refinance, is your decision-making done? No, why would life be that simple!

Let's look at an example. Suzie Q and her husband, John Doe, have a current home loan of $172,000 at 6.375%; they have 22 years left on the loan. Their options are shown in the Table below:

From the Table, some things jump out. First, there's some money to be saved here! At first glance, it would seem to be a good idea to refinance for 30 years and gain $329 a month. Going to a 15 year loan would mean having to pay a higher monthly payment, but the loan would be paid off when Suzie & John plan to retire at 65 years old.

Mmmm, let's look at some more information, just to keep this interesting. Take a look at the two columns on the right.

Wow! Look at how much Suzy & John will pay in total interest costs over the lifetime of the loan. For a given loan amount, the interest rate and the number of years of the loan both affect total interest costs – and small changes in either one can lead to dramatic changes in the total interest paid!

Look at the difference between the 30 year loan and the 20 year loan. With the 30 year loan, Suzy & John will pay over $57,000 more in interest to their lender than with the 20 year loan. That's a lot of hours worked! Dropping the loan term to 15 years lowers the interest paid even more.

So, which loan should Suzie & John take? What do you think? Questions that could help them decide include:

• Do you need more cash now to pay expenses? Can you afford to pay more in monthly home payments now (for the 15 year loan)?
• How important emotionally and/or financially to you is to have your home paid for by the time you retire?
• If you had more cash now could you invest it and receive a better rate of return than 4.625%? Could you do this for 30 years?
• Would you rather pay more now and pay less in interest charges over the lifetime of the loan?
• Are there any tax disadvantages to having less home mortgage interest? Would reducing your home interest amount mean that you couldn't itemize your tax deductions – and would it matter?
• If your goal is to increase your net worth at retirement, what would you want to do?

Let's get some conversation going on this! What would you suggest Suzie Q and John Doe do, and why? Click on my name below and send me a reply. I will share answers in next week's blog post.

Update: This blog post was shared on the Carnival of Personal Finance. Reading a variety of financial blogs provides different viewpoints and ideas to help you with your personal finances.

Who couldn't use a little more cash each month! Refinancing your home mortgage might be the solution.

Given today's economy, interest rates on home loans are relatively low. It may make sense for you to refinance your existing home loan. Or, it might not! Like most financial decisions, you need to think about the costs and benefits.

Why do people take the time to refinance home loans? You might be asking yourself, "The loan I have now is working fine ... why should I change it?"

Refinancing a home loan can help people who have different goals. Refinancing can allow people to:

• get a lower loan interest rate,
• change from an adjustable rate mortgage (ARM) to a fixed rate mortgage,
• change from an ARM loan to a different ARM but one with better terms, or
• change the number of years on a loan.

To decide if refinancing a loan makes financial sense for you, you need to start by asking yourself these questions:

• What are the initial refinancing loan costs? (It's important to ask about all costs. Costs can vary depending on the lender.)
• How long do you expect to own this home?
• When will savings from a lower interest rate loan pay for the refinancing costs?

For example, let's assume refinancing a home loan costs $3,000. In this example, the homeowner will have a mortgage payment of $50 less per month after refinancing. Then we know ($3,000 divided by $50) that it will take 60 months (or 5 years) for the savings to pay for the refinancing costs.

You can use a mortgage calculator, like the one at Bankrate.com, to help you calculate whether or not refinancing your home makes sense to you.

For more information about refinancing a home loan, visit the U of I Extension website, Opening Doors to Housing Success.

And, if you do decide that it makes sense to refinance your home mortgage loan, what should you do with that extra cash? Why, invest it for your retirement! What else would I recommend?! For ideas about how to effectively save for retirement, visit the Plan Well, Retire Well website.

Comments? Click on my name below and send me your thoughts!

I was a little surprised to see an article in the August issue of Money Magazine titled "Cure the Summer Landscape Blues." But it reminded me that I've been a true cheapskate when it comes to my garden. So I thought I'd share a few of my strategies with you.

I have re-used or repurposed so many things in my garden- plants, hardscape, even sod and dirt.

• If I'm removing sod in one place to expand a flower bed, I take it up carefully and look around to see where I need to improve the grass, and plop it down - after a little prep of the site, of course.
• When we replaced our paved driveway with concrete, they removed the existing gravel and sand base. I save a few wheelbarrows full and used them as the base for my paved landings at the foot of the stairs from my deck.
• The first owners of our house had a sandbox for the kids. The next owners poured soil into it and turned it into a not-very-functional planter. I finally tore it down, and used that wonderful topsoil/sand mix to top dress an area of my lawn where the soil is absolutely horrible. That grass has looked better this summer than ever before.

I'm careful with gardening expenses in other ways too. If I'm not sure a new plant will like my site - or that the rabbits will like it too much - I start small, often one from an even an end-of-season sale.

Many store closings are not places to find deals. It's made the news about how the liquidators may charge more for an item than you could have bought it for on sale before the store closing. But I have been fortunate in the past with landscaping materials. When a K-Mart closed a few years ago, I stocked up on bagged mulch at 50% off. And as far as I know, mulch NEVER goes on sale.

But later, I found an even cheaper way to mulch my flower beds and trees. My village (in any other state, it would be called either a town or a city) chips trees and branches that are downed in storms, pruned limbs from parkway trees, or brush placed on the curb by homeowners during seasonal pick-up days. All those chips are available free for the hauling. Actually, if I wanted an entire truck load, they would deliver. But I'd have no control over the quality of the load.

How to get this stuff home? I use the large paper yard waste bags that we are required to use if we dispose of yard waste. They cost about $.50 each. Wait, you say, that's a waste of money! It would be, if I used the bags once for this purpose and threw them away. But I don't. I can usually use the same bag for 2 or 3 trips to the chip pile if I don't fill them too full. Then I dry them and put them away, to use when I have yard waste that I can't dispose of on my own property.

And speaking of paying to have yard waste hauled away: I keep that to an absolute minimum. We almost always mulch our grass clippings and let them fall back onto the lawn. I shred and save my leaves each fall, corraling them with hardware cloth or other spare items. Next year, when I'm putting down new wood chips, I'll spread a layer of leaves first, then the wood chips.

Right now, I've got my eye on a pallet of bagged top soil at the local grocery store. The price has already been reduced. But I'm trying to wait until they've given up on selling it, in hopes they'll accept my offer for an even lower price. Keep your fingers crossed for me.

I'll bet any of you who are gardeners have tips about how you've kept costs down. Click on my name below and tell me about it. We'll share those ideas in a future post.

Everyone is talking about energy use and saving money with home energy improvements. People are buzzing about white roofs in the New York Times, By Degrees: White Roofs Catch On as Energy Cost Cutters, to tax credits in the The American Recovery and Reinvestment Act (ARRA).

I like the tax credit because it helps save money in two ways: first, you can save money for home energy improvements by receiving the tax credit and second, you will save money in energy costs once you've made these home improvements.

Remember, a tax credit helps you on your tax bill more than a tax deduction. When you receive a tax credit, the amount is subtracted from the amount of tax you owe. (In contrast, a tax deduction is deducted from your income before you calculate the tax you owe.)

The new law increases the energy tax credit for homeowners who make energy efficient improvements to their existing homes. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements, and raises the maximum credit limit to $1,500 for improvements made to your home between January 1, 2009 and December 31, 2010.

Be sure to consult a tax professional and read the IRS fact sheet 2009-10 about the Residential Energy Property Credit to be sure your improvements qualify before planning to use this tax credit.

Which home improvements will qualify for this tax credit? Home improvements such as the cost of insulation, energy-efficient exterior windows, and energy-efficient heating and air conditioning systems qualify. Installation doesn't qualify. For a list of qualified improvements, visit the Energy Star website.

How can you benefit from this tax credit? For example, new ENERGY STAR qualified windows can help reduce your energy bill up to 15 percent. Now, with the tax credit you can reduce the cost of installing new windows. If you have noticed drafts in the winter, or one of your rooms with many windows feels especially warm in the summer, then these are good clues that your home might benefit from new Energy Star qualified windows.

For other ways to save on home improvement costs, also at the energystar.gov website is a "rebate finder" webpage. You can enter your zip code and find out about other rebates and credits for making home energy improvements.

Now may be a good time for making home energy improvements. I know I'm planning to investigate some home energy improvements that we need to do while I can take advantage of this tax credit. What about you?

Financial planners always say to save money for the unexpected. I think we should just admit that the unexpected expenses will always happen -- that's just life! We may not be able to predict just what the unexpected expenses will be ... but something will need to be repaired or replaced. Whether it's a flat tire, an appliance that breaks, or something else, unexpected expenses happen to everyone.

My latest unexpected expense is our house foundation. We have a quite large crack in foundation, plus the wall is starting to curve in -- yikes! I really wish it was as simple as a flat tire! Luckily we do have savings to pay for this so that we don't have to pay for this unexpected expense with a credit card with high interest rates or take out money from our retirement accounts. If we didn't have savings, paying for this expense by other means would have made our repairs even more expensive.

How can you plan for "unexpected" expenses? You need to build up a savings fund in either a savings account or money market account from which you can withdraw money easily. If you need help finding money to save, visit the Plan Well, Retire Well website. Saving tips and strategies at this website can help you get started.

How much should you save for home repairs? A good rule of thumb is to save 1 to 2 percent of the purchase price of the home for annual maintenance and repairs. If your home or the appliances are older, you may need to save an even bigger amount.

Plan ahead for major purchases and estimate when you might have to purchase something new. According to industry officials, the average life span for the following appliances is estimated at:

• Roof – 20-25 years
• Heating system – 25 years
• Refrigerator – 20 years
• Freezer – 20 years
• Clothes dryer – 18 years
• Range/oven – 18 years
• Room air conditioner – 15 years
• Clothes washer – 13 years
• Water heater – 13 years
• Central air conditioner – 12 years
• Dishwasher – 12 years

Do you have a savings fund for those unexpected expenses that we can all expect? If not, now is the time to start building it up!