Low Interest Rates: Is a Refinance the Right Decision?

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Low Interest Rates: Is a Refinance the Right Decision?

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Once at rock bottom, interest rates have ticked up slightly. But the prospect of refinancing a mortgage is still attractive. Find out if it’s a smart move for you.

Months ago, according to Freddie Mac statistics, interest rates fell to record lows. If you didn’t refinance your mortgage at that time, a refinance still could be a good financial move now. Do your homework to see if a refinance makes good financial sense — but make a decision soon.

An August 2013 Freddie Mac study reports that interest rates are projected to rise to 5% or above by August 2014.

“The window hasn’t closed, but homeowners should analyze their mortgage situation to see if a refinance can improve their overall financial picture,” says John Young, director of real estate product management at USAA.

Mike Fratantoni, vice president of research and economics at the Mortgage Bankers Association, agrees. “When market rates were at 3.5%, 90% to 95% of outstanding loans would have benefited from a refi,” he says. Now, with mortgage rates at about 4.4%, he says that just 25% to 30% of homeowners with outstanding loans would come out ahead.

Here’s a guide to the current refinancing marketplace and the factors to consider when making your decision.

Why refinance?

Homeowners consider a refinance to:

Pay off your mortgage early. Moving from a 30-year term to a 15-year term without a big jump in monthly payments could save you thousands in interest and help you build equity in your home faster.

Create more cash flow. Lower interest rates can create lower monthly mortgage payments, freeing up money to pay down debt or just to provide more wiggle room in the budget for other things.

Access home equity. On a cash-out refinance, you borrow more money than you owe on your current loan, and use the funds for purposes such as reducing other debt, remodeling your home or just recovering from a financial setback. “As home values start to rise, there is some pent-up demand for a cash-out refinance to access the equity in the home for other purposes,” says Diane Brooks, real estate product management director at USAA.

Would refinancing benefit you?

Fratantoni puts today’s mortgage holders into three categories:

  • Already refinanced: Those with strong credit, job security and plenty of home equity. These homeowners have refinanced in the past few years and secured a rate in the low- to mid-3.0% range.
  • Already refinanced through federal programs: Those with good credit and employment but not enough equity to qualify for traditional refinancing. These borrowers only qualify to refinance through federal programs such as the Home Affordable Refinance Program, known as HARP, or the Federal Housing Administration’s streamline refinance – both advantageous to a homeowner who owes more on his mortgage than his home is worth. (Consumers must work directly with their loan servicer for the HARP; USAA works with the FHA through our Military Home Loans Joint Venture). Fratantoni notes that many homeowners who qualify for those programs have refinanced.
  • Current candidates for traditional refinancing: Those who have regained their financial footing after a job loss or credit trouble, or who are no longer underwater as home values rise. Those from Category 1 who never refinanced also fall into this group.

USAA’s Brooks would add a fourth category for recent purchasers who secured a low-interest-rate mortgage. A refinance for these mortgage holders, she explains, does not make sense.

If you’re in the market to refinance, consider these factors:

The numbers. Do your financial homework, says Brooks. “It’s not just about payment savings. That’s not the whole story,” she says. How quickly will you recoup closing costs — typically between 2% and 5% of your loan? How long do you plan to stay in the home? How long are you extending the term?

Your emotions. Doing the numbers may not reflect how badly you want more cash flow in your budget or how passionate you are about that kitchen remodel. So even if the numbers aren’t optimal, there still could be enough of a financial and emotional boost to justify a mortgage refinance. Just remember, you are leveraging your home, Brooks says.

Need for flexibility. A 30-year loan, while having a slightly higher interest rate, can provide a lower monthly payment that’s more manageable in lean financial times. Young explains, “On a 30-year loan, you can make a larger monthly payment to pay the loan off in 15 years. If you run into cash flow problems, you can always make the minimum payment. Refinancing for a 15-year loan, while getting you a better interest rate, will also get you a higher minimum payment that must be paid on time.”

Financial readiness. Ask yourself these questions:

  • How’s my credit score? A stellar credit score can help you get a good interest rate.
  • How will I pay closing costs? Plenty of people roll them into the refinanced loan amount. But, Young asks, “Do you want to pay interest on the closing costs?” Saving enough to pay for the closing in cash can make the refi an even better deal.
  • Where does my mortgage fit into my family’s financial picture? Consider your overall budget, investments, college savings plan and other financial goals.

Discipline with savings. If your refinance lowers your monthly payment, what will you do with the extra cash? Many people don’t have a good strategy for this additional monthly savings. Ideally, the payment savings should be applied to other debt or to boost your savings account, Brooks says.

When Refinancing Doesn’t Make Sense

  • If you’re closer to the end than the beginning of your term, don’t start over. If you’re 18 years into a 30-year term, you’re paying more toward principal than someone just three years into a 30-year loan.
  • If your rate is not much lower. The rule of thumb says the mortgage interest rate on a refi should be about a point or more lower than your current rate before you even consider a refinance.
  • If you don’t know how long you’ll be in the home. Are you planning to move soon? Could you be relocated for a job? You may not recoup closing costs if you have to have to sell your home sooner rather than later.

 

February 17, 2014 |

Recession Repair: 6 Steps to Get Your Retirement Back on Track

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Did your retirement train get knocked completely off the tracks as it passed through the Great Recession of 2008? If so, you’re not alone. Despite officially ending in mid-2009, our country’s most recent financial fiasco left countless retirement plans in ruins. Four years later, many people are just starting to get their bearings again. I know this because I get questions from them every day.

Many ran up debt, stopped saving, used their savings and investments, or in a panic, pulled their retirement investments from the markets. Sound familiar? While some of these moves were probably unavoidable or at least understandable, each one may have played a part in derailing your retirement train. But rather than dwell on the past, it’s time to move forward into recession repair mode.

Here are my six steps to get your retirement back on track.

1. Focus on logic, not emotion. We’re all human, and sometimes we indulge in a little self-pity when things don’t go our way. You may even be tempted to just give up. But what’s done is done. Now is the time to get busy and move forward. The longer you wait, the harder it will be to take the initiative and regain the momentum.

2. Assess your situation. Before you can begin moving forward, you’ve got to be honest about where you’re starting. Critically assess your situation. Look at your lifestyle and cash flow for places to adjust so that you’re spending less than you earn. Ask yourself, “If I keep spending at the same level, will I be able to save enough to get back on track, or do I need to make some changes?” Bottom line: Get a firm, honest handle on where you’re sitting.

3. Fix whatever needs fixing. If the recession left you in a financial hole, get busy digging out and rebuilding a solid financial foundation. For many people this will mean reducing consumer debt and rebuilding emergency savings. To make this happen, you’ll have to cut expenses or find additional income — or do some combination of the two. If cutting costs is your answer, make sure you rein in your spending enough so that you have extra money to either pay off high-interest-rate debt or save and invest.

4. Revisit your retirement vision. Once you know where you stand, you then need to take a serious look at whether your former retirement vision is still a possibility. Maybe you’ll now have to work a bit longer or live on a bit less. The key is to set a realistic vision based on where you sit today, not where you sat five years ago. Not looking good? Refer to step 1 and then create a new vision for yourself.

5. Figure out how to make your plan happen. Now that you’ve got a revamped vision in place, you’ll need to do some number crunching to see what it will take to pull it off. And what if the numbers just don’t work even with an adjusted retirement vision? Adjust it again. Remember, you’re trying to build a realistic plan that you can achieve, not strive for something destined to fail.

6. Play catch-up. Finally, one of the best ways to make up for lost time is to simply use new money more wisely. If you get a pay raise, put it toward your retirement instead of letting it add to your lifestyle. Tax refund? Use it. Bonus? Use it. Sold something? Use it. Car paid off? Use it. Take any extra money and use it to strengthen your financial and retirement plans.

Recessions stink (that’s a technical term). And Great recessions stink even more. But here’s the thing: Recessions and other financial setbacks happen all the time. The sooner you assess the damage and develop a plan to get yourself back on track, the sooner you’ll be able to get the train rolling again.

February 10, 2014 |

7 Tips for Choosing the Right Bank

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You’ve got enough going on in your life, and the last thing you want is to spend time jumping through hoops with your bank. Who has time for that?

Many banks have turned to new ways of making profit after regulations started putting the squeeze on the ways they used to collect fees from credit cards and checking accounts. Accounts you’ve held for years may see significant changes in the future — if they haven’t already. Make sure you read any notices your bank sends you about changes to your checking accounts or their fees. If you feel you’re not getting a good deal, it may be time to make a switch. Here are some thoughts on what to look for if you’re on the hunt for a new bank.

1. No Nickel-and-Diming

Look For: Checking accounts with no monthly fees.

Avoid: Simply put, monthly fees. Some banks’ charges can reach $15 a month or more. Also, in order to avoid paying fees, some banks make you meet requirements, such as maintaining a certain bank balance, enrolling in a direct deposit program or conducting a specific number of transactions each month.

2. Helpful Overdraft Policies

Look For: A bank that won’t let you overdraft your account when you make a debit card purchase or use an ATM.

Avoid: Banks that ask your permission to let you overdraft your account with debit cards and ATMs. The fees charged for overdrafts can reach as high as $38, according to the Federal Deposit Insurance Corporation. “Be sure to watch out for overdraft protection programs that charge you a fee to pull your own money from your own savings account to cover a debit transaction,” adds Collins.

3. Free ATM Access

Look For: The flexibility to use ATMs outside of your bank’s network without paying additional fees.

Avoid: Banks that charge transaction fees for using ATMs outside of their network. “Out-of-network ATMs charge their own transaction fees — in addition to whatever fees your bank may be charging you,” says Collins. “You could be charged two separate transaction fees for a single, out-of-network withdrawal, creating an expensive double whammy to access your own money.”

4. Electronic Bill Pay

Look For: A free service that lets you pay bills when and where you want. “For many merchants and vendors, your payments will arrive faster online than by mail, and you’ll save the cost of a postage stamp,” adds Collins.

Avoid: Monthly fees charged for online bill payment or a high minimum-balance requirement to waive the monthly fee.

5. Free Checks

Look For: Even in an era of online bill payment and debit cards, you may still need to write an occasional paper check. “Who wants to pay for something they may rarely use?” asks Collins.

Avoid: Annual fees charged for debit cards.

6. No-Cost Debits

Look For: Free use of a debit card for convenient, safe purchases.

Avoid: Annual fees charged for debit cards.

7. Banking on the Go

Look For: The ability to check your balances and account activity, transfer funds, deposit checks and pay bills with your cell phone, iPad® or mobile device.

Avoid: A bank that makes it hard for you to access basic customer service functions when you travel or move.

December 4, 2013 |

Best and Worst Times to Buy a New Car

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When it comes to car shopping, timing is everything. But the formula for figuring out the perfect time to make the purchase can be complicated.

If you’re shopping for your next new car, keep the following tips and statistics in mind.

Shop early in the week.

Most consumers shop on weekends when dealerships are full and salespeople are busy. By avoiding the crowd, you can get the salesperson’s undivided attention.

Make your offer at the end of the day.

Salespeople are anxious to get home and may not want to spend hours negotiating a sale. Keep in mind, this is not the best time to be casually browsing, so if you’ve done your homework, know exactly what car you want to buy and are ready to make a reasonable offer, visiting the dealership near closing time may save you both time and money.

Visit at the end of the month/quarter.

Dealers and salespeople have monthly and quarterly sales goals they must meet in order to qualify for certain bonus levels. So the end of the month or quarter is a good time to go shopping. Although you can’t predict whether or not the dealers or salespeople have made their sales goals, it’s still worth a drive-by to see if they’re hungry to make some real deals.

Get deals on outgoing models

Manufacturers typically roll out new-model-year vehicles in late summer and fall. Because dealerships are trying to make room for the new inventory, this often creates a great deal of price flexibility. While outgoing models may be in short supply — and dwindling as the year ends — your selection may be limited. But manufacturers quite frequently offer additional sales incentives on lingering models, bringing their prices down even further.

Snag year-end savings

As the new calendar year approaches, dealerships are trying to meet year-end sales quotas that could reduce fees and taxes on year-end inventory. Plus, sales people are trying to meet year-end sales quotas that may trigger bigger holiday bonuses. On top of that, incoming newer models may be in greater supply, making their pricing more flexible. It’s the perfect combination for new-car shoppers looking to find a great deal on their next new car.

Look for seasonal discounts on body styles.

Most body styles are well-discounted in December and January. According to TrueCar, these two months have the highest discounts available all year, averaging 6.6%, for convertibles, coupes, sedans, trucks, sport utility vehicles and even minivans.

August is also considered a good month to get discounts on several body types — most notably, wagons, sport utility vehicles and coupes — since that’s the time of year when a new model year rolls in.

Shopping for a convertible? TrueCar’s statistics show that discounts for these cars are deeper in the winter months. Dealers know consumers are more interested in top-down driving when the weather is warmer, so they’re not as inclined to offer discounts during the summer months. On the other hand, it’s much easier to move those convertibles off the lots in the winter if dealers put an additional sales incentive on the hood.

When is the worst time to buy a new car?

These historic statistics show that springtime may not be the best time to buy a new car: More people are out and about as winter weather clears, and tax refund checks are warming consumers’ pockets. With summer days ahead, more shoppers with a little extra cash in hand are looking for their next new car — which means dealers don’t need to offer quite as many discounts to entice those eager shoppers to buy.

So what’s the answer? When is the best time to buy a new car?

While TrueCar’s statistics show the winter months offer the greatest potential discounts, that doesn’t mean you should necessarily wait until then to make your purchase. Remember, as the year wanes, inventories become more limited, so even though great discounts may be available, they might not necessarily be on the exact model you may be shopping for. So if you have your heart set on something, you should think about if the extra savings is worth perhaps missing out on the car you really want.

 

November 1, 2013 |
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