Chasey_Lane said:
But, what about refinancing to pay off debts from credit cars and other loans? Your monthly mortgage payment may go up $200-$300, but you would be out of other more costly obligations. I honestly think you have to look at refinancing on a case-by-case scenario.
If you are refinancing to pull money out that will never effect the determination that you have issues if you are paying points for the loan. Paying points on a refinance, especially to pay off debt, is throwing away your asset value for debts you already have. You have just automatically increased your total debt load for nothing. Also, your new debt payment on the house may be smaller but your equity paid down every month has been drastically reduced. You are just renting your debt instead of gaining value.
In addition, if you are looking at refinancing your mortgage to pay down debts, you better make sure you that you close those accounts that got you there in the first place or you will be just using in equity gain to chase your debts. When you go to sell your home, you probably won't even have enough equity to pay commissions or anything else... if your home hasn't lost value for any reason. If you are refinancing to go interest only to just keep affording your debt load, then you should be selling your home, paying off debts, and getting something more afforadable.
But, back to the original topic of paying points for refinancing. On a loan value of $300k, you have probably paid 3/4-1 point to go from 6.125 to 5.5 (at the minimum). So, you just paid up to $3k of your equity back to the bank just for the rate. On top of that you will have costs even if they don't charge you closing fees or any of the stuff they advertise as no cost (i.e. if you have had the home more than a year, you probably need an appraisal, survey, and other assorted items). Lets say you get lucky and between points and refinance it only cost you $4k. You borrowed $50k of your equity and had $250k owed to make the $300k (will be a $304k loan once costs rolled back in).
On that calculation: For those first 20 months you would be paying interest and the refinance costs. You have now forked over $4k for the privilege of not paying on your debts for another 20 months. You spent $200 a month for that privilege. On $50k of debts you would have to have a huge interest difference from the mortgage to make that $200 even remotely worth while for a number of reasons:
1) Your worst outside debt would be credit cards. You have now probably made those a thirty year loan. The amount of principal you pay per month on the portion that is the credit card refinanced debt is much less than the same principal you would have gained paying on the credit card payment itself.
2) You have extended your debts out to thirty year payments. If you hold your house for even ten years, you are probably paying double or triple the cost of the original interest values on those credit devices. You may owe less interest but it is spread over many more payments (i.e. a high rate 10% loan for a 6 year period on $10k would cost you 13339 in payments; a 6% loan paid off over 15 years [shorter mortgage] would cost you $15,189).
You could argue that the lower payments give you greater cash flow for investments that might make more than the 6% per year, but if you are borrowing house equity to pay off debts than you aren't going to be doing that either. If you were that financially capable you wouldn't be carrying debts at high enough rates to make the refinance worth while. You would be paying them down. If you are hoping you will take that money and make more denying your past history, then you are gambling.
I hope this was to the point, I typed these paragraphs with major breaks in between for non-SOMD issues and its hard to keep a train of thought going that way.
Also, I made liberal assumptions above to err on ya'lls side. The true costs of refinancing and points will come out higher than $4k if you have had your mortgage for more than a year. It becomes much worse the higher Loan to Value you take.
And I never said refinancing was always a bad idea. I just said if you are paying points, than you already have signed into the not a good deal area of refinancing. I also said if you have an interest rate that is at least a reasonable difference from the current it was a good idea (or if you are in a variable rate and need to lock before rates climb).
Remember, to get a $200 lower payment on a $300k loan you need a health percentage difference. More than likely you aren't going to get much more than a $100 a month savings which will take you 3 years or more just to pay off any costs you had for refinancing and your equity will have not gone further down over those 3 years since you will just be paying the the refinance cost.
