Refinancing won’t always save money

It’s difficult not to feel bombarded by all the advertisements and news stories screaming, “Now’s the perfect time to refinance your home!” And with the historically low interest rates out there — and many of us trying to save a dollar anywhere we can — it’s no wonder people are investigating options to pay less on their home loan each month.

There’s a lot of free information out there, but it can be tricky to wade through if you’re unsure of what you’re doing. So, where do you start?

“The first question really is, ‘Do I really need to refinance?’ ” says Ted Jenkin, co-CEO of Oxygen Financial, an Alpharetta financial planning firm.

Many people get tempted by a lower interest rate, Jenkin says. “They don’t go through the math to say, ‘Does it really make sense for me to refinance?’ ”

Jenkin also says people should consider their personal timeline before refinancing. For example, if you’re 40 years old and refinance into a new 30-year mortgage, do you really want to be paying it off until you’re 70?

“Of all the people I’ve seen be successful, almost all of them have no mortgage debt into retirement,” Jenkin says.

People ultimately should consider the total cost they’ll end up paying on their home, says Cass Chappell, president of financial planners Chappell, Mayfield & Associates in Atlanta.

“We’re such a cash-flow-oriented society,” Chappell says. “We’re so focused on, ‘What’s my monthly payment?’ without looking at the total payment.”

In fact, many times you’ll end up paying much more if you refinance your house over 30 years, even with a lower rate, than you would if you had, say, 15 years left on your mortgage with a higher rate, Jenkin says.

“The allure of [refinances] is that it’s a lower payment, but it’s a payment for longer,” Chappell says. “It’s only good if it’s going to lead to a lower total payment.”

Also, make sure you have a basic understanding of the mortgage system, including how points work. A point is equal to 1 percent of the total principal amount of the loan, and it’s one way lenders or mortgage brokers make money. Some lenders will quote a rate based on your paying those points up-front. If that tightens your belt too much, you can instead roll the cost of points into your loan.

But that will increase your loan principal — and, thus, your monthly payments — and usually cost more over the life of the loan.

Similarly, make sure to factor in closing costs. When you see someone advertise “no closing costs,” it doesn’t mean you don’t have to pay money.

“They roll the cost into the note,” says Jenkin. “When you actually close the loan, it might be $105,000 [on a $100,00 loan], so you actually take on more debt.”

– By Lauren Davidson, Atlanta Bargain Hunter

See a great deal I should know about? Email me at ldavidson@ajc.com. You can also follow me on Facebook or on Twitter @atlbargains.

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