Should I Refinance My Phoenix Home?

Refinancing can be described
as acquiring a new mortgage
loan to replace an existing loan
where the bulk of the proceeds
are used to payoff the existing
loan. There are many reasons
to consider refinancing your
Phoenix real estate and some
may be more wise than others.

• Gain the benefits of a lower interest rate.
• Lower monthly mortgage payments.
• Consolidate other loans or debts.
• Make home improvements.
• Raise cash for other purposes.

How Refinancing Works.

Assuming adequate credit, a lender will generally loan about 75% of the home's real estate equity based upon a credible appraisal. Some will consider less and some may consider more. At a minimum you would have to have enough equity in the home to payoff the existing loan plus the costs associated with acquiring the new loan. If you have enough equity build-up, often refinancing gives you the option of receiving excess cash to be used for other purposes. However, keep this in mind:
the larger the refinanced loan....the larger the resulting monthly mortgage payment.

Savings versus Time.

A general rule-of-thumb is to consider refinancing when the existing market interest rate is at least 1.5% lower than the interest rate on the existing loan. A lender will charge fees to refinance a loan. There will also be typical closing costs associated with the refinancing.

You must consider how long it will take to offset the total costs associated with the refinancing. Assume for expample that the total cost will be $3,000 and the lower interest rate will result in a lower monthly mortgage payment of about $84. In that scenario it would take about 3 years for the savings to offset the $3,000 cost ($84 x 36 months = $3,024). Look at it this way, the ROI (return on investment) would be 33% annually.

The key to making a refinancing decision is projecting how long you are likey to keep your existing home. Three years will break you even and each year thereafter will realize a cash saving of $1,008 ($84 x 12 months = $1,008).

The above is not always necessarily true because refinancing will usually lengthen the time it will take to payoff the loan. For example, if you are 4 years into a 30-year mortgage and the new refinaced loan begins a new 30-year amoritization, you actually end-up making loan payments for 34 years instead of 30-years.

Gaining The Benefit of A Lower Interest Rate.

As discussed above, the most popular reason for refinancing is to take advantage of lower interest rates on your Phoenix real estate or home. Often homebuyers opt for Adjustable Rate Mortgages (ARM) with interest rates that are lower than Fixed Rate Mortgages. When the higher adjusted rate for an ARM exceeds the market rate by 2%....it is generally time to consider refinancing if you plan on keeping your home for about 3 more years.

Refinacing For Extra Cash.

If you have enough equity in your home, you can consider refinancing to gain spendable access to the additional equity. This is often called a "home equity loan". The funds can be used to payoff other loans (debt consolidation), pay for a college tuition or to take a much-needed vacation. You might also consider making home improvements which could increase the home's value.

When is Refinancing Prudent?

The simple answer is when it makes sense economically. A word of caution is to make well-thought prudent decisions that satisify economic needs and lifestyle desires. There are also tax-related factors that could either be an advantage or disadvantage, so consult with a tax advisor. One thing for sure....talk to more than one Phoenix area lender and select your lender carefully. The more you educate yourself, the more likely you will make well-informed decisions.

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