Does It Pay To Refinance?

Refinancing isn't always the best move. Here are some things to consider before you decide to redo your mortgage.

Refinancing a mortgage means paying off an existing loan and replacing it with a new one.

There are many common reasons why homeowners refinance: the opportunity to obtain a lower interest rate; the chance to shorten the term of their mortgage; the desire to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa; the opportunity to tap a home's equity in order to finance a large purchase; and the desire to consolidate debt.

Some of these motivations have both benefits and pitfalls. And because refinancing can cost between 3% and 6% of the loan's principal and--like taking out the original mortgage--requires appraisal, title search and application fees, it's important for a homeowner to determine whether his or her reason for refinancing offers true benefit.

One of the best reasons to refinance is to lower the interest rate on your existing loan. Historically, the rule of thumb was that it was worth the money to refinance if you could reduce your interest rate by at least 2%. Today, many lenders say 1% savings is enough of an incentive to refinance.

Reducing your interest rate not only helps you save money but increases the rate at which you build equity in your home and can decrease the size of your monthly payment. For example, a 30-year fixed-rate mortgage with an interest rate of 9% on a $100,000 home has a principal and interest payment of $804.62. That same loan at 6% reduces your payment to $599.55. (To learn more about the home costs, see "Mortgages: How Much Can You Afford?""Home-Equity Loans: The Costs" and "The Home-Equity Loan: What It Is And How It Works.")

When interest rates fall, homeowners often have the opportunity to refinance an existing loan for another that, without much change in the monthly payment, has a shorter term. For that 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to $5.5% cuts the term in half to 15 years, with only a slight change in the monthly payment, from $804.62 to $817.08.

While ARMs start out offering lower rates than fixed-rate mortgages, periodic adjustments often result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to a fixed-rate mortgage results in a lower interest rate and eliminates concern over future interest rate hikes.

Conversely, converting from a fixed-rate loan to an ARM can also be a sound financial strategy, particularly in a falling interest rate environment. If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing rates and smaller monthly mortgage payments, eliminating the need to refinance every time rates drop. Converting to an ARM may be a good idea, especially for homeowners who don't plan to stay in their home for more than a few years. If interest rates are falling, these homeowners can reduce their loan's interest rate and monthly payment, but won't have to worry about interest rates eventually rising in the future.

While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt. It's important to keep this in mind when considering refinancing for the purpose of tapping into home equity or consolidating debt.

Homeowners often access the equity in their homes to cover big expenses, such as the costs of home remodeling or a child's college education. These homeowners may justify such refinancing by pointing out that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source. Another justification is that the interest on mortgages is tax deductible. While these arguments may be true, increasing the number of years that you owe on your mortgage is rarely a smart financial decision, nor is spending a dollar on interest to get a $0.30 tax deduction.

Many homeowners refinance in order to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. Unfortunately, refinancing does not bring with it an automatic dose of financial prudence.

In reality, a large percentage of people who once generated high-interest debt on credit cards, cars and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so. This creates an instant quadruple loss composed of wasted fees on the refinancing, lost equity in the house, additional years of increased interest payments on the new mortgage and the return of high-interest debt once the credit cards are maxed out again. The possible result is an endless perpetuation of the cycle of debt.

Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. When used carefully, it can also be a valuable tool in getting your debt under control. Before you refinance, take a careful look at your financial situation and ask yourself, "How long do I plan to continue living in the house?" and "How much money will I save by refinancing?" (For more information, see "The True Economics Of Refinancing A Mortgage.")

Again, keep in mind that refinancing generally costs between 3% and 6% of the loan's principal. It takes years to recoup that cost with the savings generated by a lower interest rate or shorter term. So, if you are not planning to stay in the home for more than a few years, the cost of refinancing may negate any of the potential savings.

It also pays to remember that a savvy homeowner is always looking for ways to reduce debt, build equity, save money and eliminate that mortgage payment. Taking cash out of your equity when you refinance doesn't help you achieve any of those goals.

For a one-stop shop on subprime mortgages and the subprime meltdown, check out the "Subprime Mortgages Feature."

This article is from Investopedia.com, the Web's largest site dedicated to financial education. Click here for more educational articles from Investopedia.

Low Interest Credit Cards

Many consumers continue to pay far higher rates of interest for spending on their credit cards than the current average APR. By simply changing to a different provider they are likely save a significant amount of money each year in interest.

People who have stayed loyal to their bank and never changed their credit card are more than likely being charged excessive rates of interest. With lower standard rates and introductory 0% offers for purchases and balance transfers available, now is the time to switch to a low interest credit card. It's never been easier to switch deals, and there is a wide choice on offer.
Posted by Mony at 2:02 PM 0 comments
Labels: Best Credit Cards
Ten ways to cut the cost of Christmas
If you exploit good deals and avoid the bad ones, then the credit crunch does not have to mean a gift crunch, find Nargis Ahmad and Julian Knight

Christmas can send a shiver through our finances. Each of us spends about £400 on yuletide presents and festivities, according to Asda. But with unemployment rising and credit both expensive and harder to get, Britons are looking to cut back – by up to £300m in total, says the Centre for Economics and Business Research. But what tactics can you adopt to make Christmas less expensive without being a credit-crunch Scrooge?


1. Look for card cashback

Many people spend more than they expect on plastic at this time of year. If that's you, look to use one of the cashback credit cards on the market. The American Express platinum card returns 5 per cent on the first £4,000 you spend in the first three months you have the plastic. Abbey's new "essentials" card offers a 3 per cent refund, up to £75 or £12.50 a month, on supermarket and petrol purchases at selected outlets for the first six months. But take care: fail to clear the outstanding balance within the interest-free period and you will be hit by high rates.

2. Get cashback on the web

Combining a cashback credit card with a cashback website could earn you even more. Sites such as Topcashback.co.uk, Greasypalm.co.uk and Quidco.com offer shoppers an additional rebate of 2 per cent to 10 per cent, but you will need to set up an account first. Some sites will only release the money once you have earned a minimum amount, and it takes time for the cash to reach you.

3. Price-comparison websites

These services can also help you to find the cheapest deals. Sites such as Pricerunner.co.uk and Kelkoo.co.uk search the web to find which stores sell what you are looking for and at what price.

4. Make use of vouchers

To save a few bob at online retailers' virtual checkouts, it's worth getting your hands on a voucher code. These can be found on sites including My-vouchercodes.co.uk, Hotukdeals.com and vouchercodes.com. It's also worth keeping an eye on forums such as Moneysavingexpert.com. Once you have found a code, all you need to do is type it in at the checkout to get the discount. But be quick, as most codes expire quickly.

5. Redeem loyalty points

Many of us will have built up pots of money on our supermarket loyalty cards, which are just waiting to be spent. Rather than using the points at the checkout, switch to vouchers, perhaps trading Tesco Clubcard vouchers for Deals Tokens through the Tesco site. These can be used for trips to the theatre, days out and jewellery, which can make nice Christmas presents.

6. Switch to Christmas ecards

Save on the cost of cards and stamps by sending a free ecard online from sites such as Ecards.co.uk or Hallmark.com. For the ethically conscious, charities now do their own ecards. Friends of the Earth is encouraging others to ditch the paper version and save trees at www.foe.co.uk.

7. Sell unwanted gifts

If last year's dud Christmas presents are sitting in the loft somewhere, now's the time to turn them into hard cash. According to a survey by Churchill Home Insurance. 21 per cent of us will sell out unwanted gifts via the internet or at a car boot sale, and 14 per cent will recycle our presents, passing them on to someone else. You can flog your clutter from the comfort of your own home by selling at an online auction site such as eBay or eBid.

8. Avoid in-store credit

We've all been there. That expensive gift that will make a loved one's Christmas can be yours at a discount, provided you take out the store card offered by the smooth-talking salesman. But store cards are expensive, often charging 30 per cent interest. And like cashback cards, if you fail to pay off the debt within the interest-free period, it can soon eat into any initial discount given for taking out the card.

9. Bulk buy wine

Lots of off-licences and wine clubs offer deals to those buying a case of wine rather than a bottle. Tesco's wine store has substantial discounts in the run-up to Christmas and free delivery nationwide on orders worth £100 or more. Likewise, Majestic.co.uk is discounting mixed-case wine deals. If you're partial to a nice vintage, the recently launched lastdropwines.com buys its stock at auctions and closed busi-nesses and sells them at discounts of up to 50 per cent.

10. Plan your present buying

Even with Christmas around the corner, a little planning can help you to spend less by avoiding impulse buying. Money advice website Fool.co.uk recommends making a list of who you want to buy for and setting a budget for each. If you think you're going to find that difficult, says Fool.co.uk, consider giving what you would spend on a present as a simple cash gift. After all, in these credit-crunch blighted times, cash is always welcome.

Does It Pay To Refinance?

Refinancing isn't always the best move. Here are some things to consider before you decide to redo your mortgage.

Refinancing a mortgage means paying off an existing loan and replacing it with a new one.

There are many common reasons why homeowners refinance: the opportunity to obtain a lower interest rate; the chance to shorten the term of their mortgage; the desire to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa; the opportunity to tap a home's equity in order to finance a large purchase; and the desire to consolidate debt.

Some of these motivations have both benefits and pitfalls. And because refinancing can cost between 3% and 6% of the loan's principal and--like taking out the original mortgage--requires appraisal, title search and application fees, it's important for a homeowner to determine whether his or her reason for refinancing offers true benefit.

One of the best reasons to refinance is to lower the interest rate on your existing loan. Historically, the rule of thumb was that it was worth the money to refinance if you could reduce your interest rate by at least 2%. Today, many lenders say 1% savings is enough of an incentive to refinance.

Reducing your interest rate not only helps you save money but increases the rate at which you build equity in your home and can decrease the size of your monthly payment. For example, a 30-year fixed-rate mortgage with an interest rate of 9% on a $100,000 home has a principal and interest payment of $804.62. That same loan at 6% reduces your payment to $599.55. (To learn more about the home costs, see "Mortgages: How Much Can You Afford?""Home-Equity Loans: The Costs" and "The Home-Equity Loan: What It Is And How It Works.")

When interest rates fall, homeowners often have the opportunity to refinance an existing loan for another that, without much change in the monthly payment, has a shorter term. For that 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to $5.5% cuts the term in half to 15 years, with only a slight change in the monthly payment, from $804.62 to $817.08.

While ARMs start out offering lower rates than fixed-rate mortgages, periodic adjustments often result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to a fixed-rate mortgage results in a lower interest rate and eliminates concern over future interest rate hikes.

Conversely, converting from a fixed-rate loan to an ARM can also be a sound financial strategy, particularly in a falling interest rate environment. If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing rates and smaller monthly mortgage payments, eliminating the need to refinance every time rates drop. Converting to an ARM may be a good idea, especially for homeowners who don't plan to stay in their home for more than a few years. If interest rates are falling, these homeowners can reduce their loan's interest rate and monthly payment, but won't have to worry about interest rates eventually rising in the future.

While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt. It's important to keep this in mind when considering refinancing for the purpose of tapping into home equity or consolidating debt.

Homeowners often access the equity in their homes to cover big expenses, such as the costs of home remodeling or a child's college education. These homeowners may justify such refinancing by pointing out that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source. Another justification is that the interest on mortgages is tax deductible. While these arguments may be true, increasing the number of years that you owe on your mortgage is rarely a smart financial decision, nor is spending a dollar on interest to get a $0.30 tax deduction.

Many homeowners refinance in order to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. Unfortunately, refinancing does not bring with it an automatic dose of financial prudence.

In reality, a large percentage of people who once generated high-interest debt on credit cards, cars and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so. This creates an instant quadruple loss composed of wasted fees on the refinancing, lost equity in the house, additional years of increased interest payments on the new mortgage and the return of high-interest debt once the credit cards are maxed out again. The possible result is an endless perpetuation of the cycle of debt.

Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. When used carefully, it can also be a valuable tool in getting your debt under control. Before you refinance, take a careful look at your financial situation and ask yourself, "How long do I plan to continue living in the house?" and "How much money will I save by refinancing?" (For more information, see "The True Economics Of Refinancing A Mortgage.")

Again, keep in mind that refinancing generally costs between 3% and 6% of the loan's principal. It takes years to recoup that cost with the savings generated by a lower interest rate or shorter term. So, if you are not planning to stay in the home for more than a few years, the cost of refinancing may negate any of the potential savings.

It also pays to remember that a savvy homeowner is always looking for ways to reduce debt, build equity, save money and eliminate that mortgage payment. Taking cash out of your equity when you refinance doesn't help you achieve any of those goals.

For a one-stop shop on subprime mortgages and the subprime meltdown, check out the "Subprime Mortgages Feature."

This article is from Investopedia.com, the Web's largest site dedicated to financial education. Click here for more educational articles from Investopedia.

your credit score

your credit score is made up of a myriad of factors. A few of these are:

1. How long your accounts have been open

2. Recency and number of credit applications

3. The number of inquiries attached to your credit report

4. The "mix" of your various credit accounts (house, car, credit card, lines of credit)

5. How long you've lived at your current address

6. How long you've work at your current job

7. Judgments, tax liens, bankruptcies, and other adverse information reported in public records

In summary, your credit scores tell companies how well you are managing your financial life. They, in turn, make decisions about their risk and your trustworthiness. High credit scores can open doors to just about anything you want, while low scores create huge hurdles that are hard to climb over.

If you are willing to take control of your financial future instead of leaving it to chance, all it takes is a little knowledge about the "do's" and "don'ts" of the credit system. Repairing your credit takes a lot of time and effort. Using the right knowledge to make good credit moves in advance, is so much easier and so much more rewarding!

Credit Repair: What’s The Score?

Article by Jim Kemish

So Many Scores
Credit scores can be confusing. FICO, TrueCredit, PLUS, Beacon, and Empirica scores are all in daily use. Why are there so many scores? A nationally recognized credit repair expert explains the different scores and how they can impact your life.

FICO, the Score that Counts

There are many credit scores available, but the FICO score is the one that matters. FICO, by the way, is an acronym for Fair Isaac & Company, the creator of the scoring model. Virtually all lenders use FICO scores to make loan decisions. If you are in a credit repair program, any score you monitor is fine for measuring progress. But if you are planning to apply for a loan the FICO score is the one to watch.

FICO and Your Lender

When you apply for a loan, the lender orders your credit report from one (or more) of the three credit bureaus, Experian, Equifax, and TransUnion. Each credit bureau report comes with a FICO score. If you speak with your lender about your credit, they are likely to refer to each of your scores using the specific credit bureau name.

The Credit Bureau Illusion

Given the constant association of FICO scores with the three credit bureaus, you might assume they have some proprietary claim on the scores. You might also assume that if you purchased your scores from the credit bureaus, you would get the same FICO scores the bureaus sold to your lender. You would not be alone. In the credit repair business, we find most of our customers make the same assumptions. The assumptions are wrong.

Credit Score Re-Branding

As an aside, I should mention that the three bureaus have re-branded the FICO scores they sell to lenders. Equifax calls it a Beacon score, TransUnion calls it an Empirica score, and Experian calls it an Experian Score. Different names, but they are all FICO scores. Our credit repair customers often ask about numeric differences in the scores. Numeric differences arise because each bureau gets information from a slightly different mix of creditors. Timing also plays a roll in score variance; a recent change in your credit may be picked up sooner at one bureau than another.

The Business of Credit Scores

As it happens, the credit bureaus don’t own the FICO scores, nor do they sell them directly to consumers. Fair Isaac & Company owns the scoring model and licenses it to the credit bureaus. The credit bureaus use the model to score the data they have on file for consumers. Then they bundle the scores with consumer credit reports and sell them to lenders. Fair Isaac collects royalties from the credit bureaus for these sales.

Putting Credit Scores to Use

If you are planning to apply for a loan, you might want to purchase your FICO scores beforehand. You would want your real scores, not “estimated” scores that might vary widely from the ones the lender will use. Yet “estimated” scores are exactly what millions of consumers get every year when they visit the credit bureau’s websites. Many of these consumers go on to apply for a loan, and are disappointed when the lender tells them that their scores are lower than they were led to believe. We hear this story almost every day from people starting up their credit repair effort.

Estimated Scores

Fair Isaac would have been happy to have the credit bureaus sell FICO scores directly to consumers. The credit bureaus, however, seeing the opportunity, developed their own “estimated” credit scores rather than paying royalties to Fair Isaac. Equifax, the exception, offers a FICO score to consumers, which provides an economical way for consumers, or anyone in a credit repair program, to monitor their score, but on its own does not provide a complete solution.

Experian’s PLUS Score

Experian sells a credit score at their website called the “PLUS Score”. Here is the small print from their website, “Your PLUS Score is formulated using the information in your credit file. It is modeled after the hundreds of commercial credit scores that help potential lenders, landlords, and employers quickly gauge your credit history and decide what kind of a risk they might be taking if they approve your application.”

TransUnion’s TrueCredit Score

TransUnion sells a credit score called the “TrueCredit” score. Here is the small print from their website. “TrueCredit” is not connected in any way with Fair, Isaac and Company; the credit score provided here is not a so-called FICO score. The credit scores of TransUnion may not be identical in every respect to any consumer credit scores produced by any other company.”

Equifax FICO Score

Equifax, as mentioned, makes a FICO score available to consumers. If you are in a credit repair program, or planning to apply for a loan, this is the most economical way of seeing a real FICO score. But it is important to know that many lenders, and almost all mortgage companies, look at all three of your FICO scores, and base their decision on the value of your middle score. One score is simply not enough.

Myfico.com the FICO Source

So, if you want to know where you stand prior to applying for a loan, or to monitor your credit repair efforts for each credit bureau, you will need to see all three FICO scores. These are available at myfico.com, The Fair Isaac website.

Copyright © 2007 James W. Kemish. All Content. All Rights Reserved.