Share with your Friends

Friday, March 1, 2013

What Will Home Refinancing do to Your Net Worth?

When mortgage interest rates fall to historic lows as they have done in the past couple of years, it’s very tempting for homeowners to want to refinance their mortgage and get a better deal on it. This can make a lot of sense, as getting a lower interest rate can save you thousands. But before you start barraging your banker or broker for a better deal, first stop and figure out what refinancing will do to your overall net worth.

Refinancing your mortgage may lower your costs in the short-term, and that can tip the money scales in your favor. With refinancing you can stretch out your amortization period and arrange for a lower monthly payment. This frees up extra cash, and is one of the reasons so many homeowners opt to refinance when rates are low – it’s like they’re getting two savings at once! But, short term benefits also often have long-term consequences and in the case of refinancing, those consequences will affect your net worth.

This is because your home is a liability on your household’s balance sheet. And even though in the case of debt, a home is always considered to be “good debt,” the balance sheet does not discern between good and bad. It’s a liability, which means it’s not good. And when you refinance so that you can make lower monthly payments, it will take you longer to pay it off and you could potentially add thousands of dollars in interest onto your total mortgage amount. That in turn, will subtract thousands of dollars from your net worth, decreasing it by as much as those interest costs.

But will refinancing always lower your net worth?

Not necessarily. You can still refinance to take advantage of those low interest costs; just ensure that you keep your amortization the same and that you continue to make the same monthly payments (or even more!) as you did before. That is only the true way to refinance without decreasing your total net worth. And even when using this option, you still need to be very careful.

Home refinancing usually comes with many different costs including closing costs and legal fees, to name just a couple. Be sure to fully review what it will cost you to refinance your home loan, and compare that against the savings. Do you have a positive or a negative after your calculation? This is the only way to know whether or not you’ll be increasing or decreasing your net worth through a refinance; and whether or not you should do it!

No comments:

Post a Comment

Comments containing links will be marked as spam and not approved. We moderate every comment.

Recent Posts

Popular Posts

Other Blogs