Should I refinance my home loan?

One sure way to start an argument between mortgage brokers, mortgage bankers, financial planners and consumer advocates is to answer the question, “when does it make sense to refinance?” Each has their own experience and training. Each has their claims to why they are the more trusted and reliable source. In reality the least trustworthy source, one source which is not required to prove their knowledge, is the “consumer advocate”. Unfortunately for the home owning public they are usually the ones with the microphone and reader distribution to get the most attention.

Instead of having yet another mud slinging party at journalists or travel agents turned consumer superstars why don’t we simply teach you, the reader who really matters, how to calculate if a refinance makes sense? There are dozens of spreadsheet programs, including Google docs, which you can use to create your own refinance calculator.

The first step really should be to ask yourself why you want to or need to refinance. There are many reasons and the consumer advocate never (rarely) takes those reasons into consideration. For example you may need to refinance your existing home loan in order to leverage some equity to start a new business. Financial planners generally will tell you never to cross the lines between home and business. In other words never leverage your personal assets to do business. But what if you need $30,000 to invest in a job you are guaranteed to return $100,000 on?

After you determine why you want or need to refinance you need to determine when you are going to repay the new loan. Are you going to repay the new loan when your investment comes back? Are you going to pay off your new home loan when you sell your home? How many years will that be? The latter is the most important question for most people.

There is a cost to refinance. Either you pay the closing costs in cash, equity leveraged back into the loan, a higher interest rate on the new loan, or a combination. Very few non-profit organizations actually complete home loan refinances at no cost to the borrower/home owner so be careful what you fall for if you fall. Especially any for profit organization and most definitely any mortgage broker who advertises “no closing costs” or “no cost loans”. Quite frankly they are lying – there are costs and you pay them.

Here is a simple refinance calculator spreadsheet to help you get started and thinking about what is important to you and not one of the earlier listed people. Remember, in the end, it is you and neither the loan officer nor Clark Howard who will be paying your payment and living with the consequences of your decisions be they failure or success.