Written by Steve Stovall
The opposite of choosing between the lesser of two evils; it’s choosing between two goods. It’s like when you are enjoying some television show, then during the commercial you flip to another channel to find that you have just missed your all-time favorite movie. It’s like when get to the Rangers game and find that you could have gotten seats behind home plate for the same price. It’s the “I could have had a V-8” syndrome.
If you’re thinking about refinancing your home, which is good, you may need to consider another option which may be better. It might be the right time for you to take the equity out of your existing home and apply it toward the purchase of another home. By doing this you might get a cheaper rate and a better house!
When Is The Right Time?
The decision to refinance or re-purchase isn’t always as straight forward as you may think. Refinancing is an attractive option because you can often lower your payments, use the equity in your home to pay for the closing costs, and sometimes even shorten the term of your loan. You stay in the same house and have lower payments. What could be better than that? Nothing, if you plan to stay in your present home for at least three or four years, but did you catch the part about using your equity to pay for the cost of the refinance. Many people are not aware that there is actually a cost to refinance, and it’s about the same, and sometimes more, than the cost to set up a new loan. When you refinance you are actually buying your house from yourself. My point is that if you are in the market to buy your house back, why not look around?
This is an excellent time to reposition, particularly if you are moving from the middle price ranges where supply is scarce to the upper price ranges where supply is ample. You may be in the enviable position of being in a seller’s market as a seller, and a buyer’s market as a buyer! While this may not be true for every price range and area of town, it is something to consider. So, before you run out and refinance you need to check out the rest of the market.
Also, consider the Opportunity Cost of refinancing. You can either roll the fees into your loan, which increases your loan balance and reduces your equity; or you can pay the cost up front – which does not lower your equity position. If you roll the costs into your loan, calculate how long it will take to recapture the fees in the amount of your payment reduction. This is your breakeven point. If you need to sell your house before your breakeven point then you will lose money because the reduction in your payments from your lower interest rate was not enough to pay for the fees involved in the refinance. If you decide to pay the costs up-front, your breakeven point remains the same but you also need to factor in what else you could have done with the cash, like getting some REALLY good seats behind home plate or more responsibly, paying off another loan.
Refinancing is a good thing, but I would hate to see you look back in a year or two and say, “I could have had a V-8!” (or a four bedroom.)
To read our previous blog, click here.