How to Know When Refinancing Is a Bad Idea

Refinancing Rethought
A Simple-Math Approach to
Mortgage Management
A Biweekly Mortgage & Loan Service
www.usequityadvantage.com
Page 2 | US Equity Advantage | Apr 2014 | Refinancing Rethought
The Trouble With Mortgages
Why Renancing Doesnt Always Make Sense
Nothing holds us down like a monthly payment. Credit cards, auto loans, mortgages the bills come in and
the money goes out. Its hard to get ahead that way, which is why people look for methods for reducing their
debt and shrinking their monthly obligations.
Mortgages are particularly oppressive loans because they last for so long, often several decades. Making long-
term plans for the future isnt easy with what feels like a never-ending commitment. Perhaps thats why so
many homeowners decide to renance.
Renancing is wildly popular in the United States. In fact, most analysts say its too popular, since it doesnt
always work out in the homeowners favor. The idea is to change the terms on a mortgage a longer loan
with a lower monthly payment, for example, or maybe the opposite: a larger payment in exchange for an
earlier payoff date and/or lower interest rate. But it doesnt always pay off.
Its all too tempting to stand around the water cooler at work or stop by the neighborhood block party and
hear your friends or coworkers bragging about all the money they saved by renancing. It sounds nice, and
that leads a lot of people to rush into renancing. But while renancing is a great idea in some situations, it
can just as often lead to unexpected nancial consequences.
When dealing with any kind of debt, the best rule of thumb is to have as little of it as possible and to get rid
of it as soon as you can. Renancing only makes sense when it helps you accomplish that goal.
Its ultimately a numbers game. By taking stock of your nancial situation, the terms of your existing home
loan, and how those terms might change, you can make an educated decision about whether renancing
makes mathematical sense for you and your family.
In the pages ahead, well walk you through renancings basics, tell you how recognize the break-even point,
and reveal the most common scenarios in which renancing is a dangerous idea. But however the math works
out in your situation, there are always alternatives, and at the end of this paper, well look at ways in which
you can shrink your mortgage debt without increasing your payments or renancing a dime.
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Renancing 101: The Basics
A house is the most expensive purchase most people will make in their lifetime. They cost tens or hundreds of
thousands of dollars (sometimes millions), and most people just dont have that kind of cash on hand. So, like
they do with college, cars and other major purchases, they take out a loan.
We tend to think of home ownership as the cornerstone of the American Dream, but the idea that most
people could own their home is actually fairly recent. In the early 20th Century, only a minority of Americans
were homeowners. Most simply didnt have enough money to buy one, and any loan would have been too
large. It wasnt until the 1930s that U.S. banks introduced the mortgage, a special kind of loan in which the
house itself serves as collateral.
The basic concept of a mortgage is simple: a bank or lender loans you a substantial sum of money (usually
80% of the homes price). In exchange, you agree to pay the sum back over a set period of time plus
interest. Because the house serves as collateral, if you fail to make your payments, the bank can reclaim the
property and kick you out at the same time through an extremely unpleasant legal process called foreclosure.
But even for people who never face foreclosure, monthly mortgage payments can be a real struggle. Thats
why many look for ways to reduce their monthly obligations. In some cases, its possible to negotiate new
terms for a mortgage, most commonly accomplished through renancing.
When you renance, you trade out your original mortgage for an entirely new one. Your new bank/lender
essentially pays off the old loan, and in return you agree to enter into a new mortgage with the new lender
(which can actually be the same bank you used the rst time, a new bank, or a non-banking entity that
specializes in mortgage lending).
The new mortgage usually comes with a new interest rate, payment term, and/or balance. For example, you
might pay less every month but for a longer period of time. Its a tradeoff. And you might also be asked to
pay all of the closing costs up-front at the time of renancing.
People usually renance to take advantage of low interest rates or the equity theyve accrued in their home.
But it isnt as simple as that, and homeowners too often rush into renancing when it isnt in their best
nancial interest. In the pages ahead, well look at when renancing makes sense, when it doesnt, and how
to tell the difference.
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Guidelines for Renancing
Why Are You Renancing?
Never do something without knowing why especially where your nances are concerned. Why are you
renancing? Are you worried about the amount youre paying each month now? Or is the long life of your
loan a bigger concern? Did you take out your original mortgage when interest rates were high? Do you just
happen to have a surplus in the bank right now and thought it might be a good idea to renance while you
can? Really think about it and ask yourself why youre renancing.
What Are Your Goals?
Once you know the why, decide exactly what it is you want to get out of your decision to renance.
Is it your goal to reduce your monthly mortgage payment? If so, by how much? Are you only concerned
about your current interest rate? In that case, decide how much you would need to save in interest to
make renancing worth your while. Do you want to pay off your loan and get that debt out of your
life as soon as possible?
All of these and more are worthwhile goals, but renancing isnt the right answer for all of
them. Clarifying your goals now will help you make the right decisions as we move forward.
Is It Your First Time?
Have you renanced a mortgage for the same property before? Most nancial experts advise
against nancing more than once over the life of a loan. If youre considering a second go-round,
youre probably further along in your loans term and there may be other, better options for
beating that debt.
Decision making is a process, and it helps to have a strategy. Thats especially true
when youre deciding whether to renance. Any decision affecting your mortgage
is an important one, and you want to make sure you take the course of action that
nancially empowers you and your family the most, taking into account both the
short- and long-term.
Below, weve put together a few important questions you should always ask yourself
before renancing. Later in this paper, well look at reasons why some people should
not renance their mortgage. Your answers here will help you determine whether
youre one of those people.
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What Does the World Look Like?
It might seem like an odd question to ask yourself, but its a good idea to size up the state of national and
global affairs any time you take on a new financial endeavor. Is the economy shaky? Hows the housing
market? What are interest rates like now and are they likely to change any time soon? You can learn a lot in
a short amount of time by tuning in to a business news network, using online financial news outlets, or
talking to a financial planner.
Checked Your Credit Lately?
Its a good idea to run a credit check at least once a year anyway, but thats an absolute must-do when
youre renancing. Your lender will want one when it comes time to negotiate a new loan, but you need to
know your situation for yourself before that. Knowing what your credit report shows will help you decide if
renancing is the right course of action. Well talk more about the relationship between renancing and your
credit score in the pages ahead.
How Much Do You Have in Your Bank?
Renancing isnt a Get Out of Jail Free card. Certain upfront costs are sometimes required.
But beyond that, you need to get a good sense of your nancial standing. Sit down with your
family and chart out your account balances, your current earnings, your total debt, and your
foreseeable income/expenses for the future.
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Rethinking Renancing
10 Times When Its NOT A Good Idea
Theres a reason renancing is so popular. It can really work out to some peoples
advantage! But dont let its trendiness trick you into renancing when it doesnt make
sense for you.
Knowing when it is a good idea to renance is tougher than knowing when it isnt. So to
get things started, well walk you through ten of the most common circumstances in which
renancing is denitely a bad idea. You might be surprised to nd yourself in one of them,
but dont fret if you do. There are still ways you can beat banks at their own game and
come out on top of your debt.
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When Interest Rates Are High
Interest rates change over time. Just as its better to buy stock when prices are low, its better to
renance during periods with lower interest rates, too. Youll likely renance no more than once
over the life of your loan, so you want to wait until the time is right. Remember that renancing
isnt a cost-free proposition. It requires time and expense
(sometimes substantial), so it has to be worth your while.
Sometimes, even a lower interest rate isnt enough. A few decimal points dont mean much in the
grand scheme of things. Most experts recommend a reduction of at least 2% in your interest rate in
order to justify renancing.
When the Effective Interest Rate and/or APR are Unfavorable
An advertised interest rate isnt always the same as your loans Annual Percentage Rate (APR)
or its Effective Interest Rate. Various institutions and jurisdictions use these terms differently,
but the important thing for you to understand is the advertised interest rate doesnt always
include things like compounded interest, front-end fees and other charges associated with your
interest rate.
Because lender fees and compounded interest are part of what youll have to pay over the life of
your loan, its important that you make them a part of your equation now.
You should ask your prospective lender what your new loans effective interest rate would be.
Also nd out exactly how they dene APR and Effective Interest Rate and whats included
in either of those. US law dictates, to some extent, how APR is calculated. But Effective Interest
Rate is less strictly regulated, so be sure your lender is painting the
whole picture.
At the end of the day, a good rule of thumb is to take all of your compounded interest and fees
into account when comparing interest rates, and dont consider renancing unless youd save at
least 2%.
Page 7 | US Equity Advantage | Apr 2014 | Refinancing Rethought
Most experts recommend a reduction of at least 2%
in your interest rate in order to justify renancing.
When You Plan to Sell the House Sooner Than Later
Its tempting to think of renancing as a way to get quick, short-term benets (e.g. lower monthly
payments), but it really isnt worth it if you plan to sell your house within the next few years. Thats
because the amount youll save each month wont add up to enough in just a few years to offset
the costs of renancing. So before you sign up for a new mortgage, make sure you and your house
are in it for the long haul.
When Your House Isnt a Home (Because Its Just an Investment)
Its been said that home is where the heart is, but a house is just a house. Not everyone buys real
estate to fulll The American Dream. Sometimes its just a good investment, whether youre renting
to tenants, ipping an older house, or simply holding onto property until
the markets change.
But banks and lenders look at investment property differently than primary residences. Many are
unlikely or even unwilling to negotiate a renance for an investment home, and when they do, its
not nearly as easy. Most lenders impose signicantly higher upfront costs, more
onerous credit requirements, and less favorable terms, and are only willing to renance a smaller
percentage of your loan. Accordingly, it rarely works out to the property
owners advantage.
When You Have Less Than 20% Equity in Your Home
When you rst start making mortgage payments, most of those checks are applied toward interest
fees rather than principal. But as time goes on, that ratio begins to change, and youll start paying
off a larger portion of your principal.
Most experts advise waiting until your ownership interest (or the equity) in your house that is,
the amount youve actually paid for it, not counting interest payments or lender fees is at least
20% of the purchase price.
You can also achieve 20% equity if the market value of your house sufciently exceeds what you
paid for it. In other words, you should only seek to renance a maximum of 80% of your homes
current market value.
Trying to renance too early, when most of your payments have gone toward interest, is like
starting all over again. Youll be right back in the beginning of a long-term loan, and youll end
up paying even more toward interest in the long run. Besides, lenders wont offer you their best
renancing terms if your equity is less than 20%.
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Lenders wont offer you their best refinancing
terms if your equity is less than 20%.
When Youre Relatively Close to Paying Off Your Mortgage Anyway
Conversely, its also a bad idea to renance when you have a lot of equity and your loan is nearing
the end of its life. You may very well end up extending the loan, meaning youll be making monthly
payments for longer. Even if theyre smaller payments, the savings wont be enough to make up for
the additional interest youll pay.
When it comes to debt, the faster you get it out of your life, the better. Dont make the road to
freedom any longer than it needs to be.
When the New Mortgage Terms Nullify The Benets of Renancing
Perhaps the three most important words in mortgaging are all things considered. Its easy to
make refinancing look like a good idea. Some terms will be more attractive than others, and a
lender trying to sell you on a new loan will want to focus on those. But remember theres a
reason they want your business!
Loan life, interest rate, closing costs, monthly payments, and lender fees are all important. A lower
monthly rate can still cost you more in interest over time sometimes so much more that its not
worth it. Weigh each new term equally so you dont saddle yourself with more debt than you can
handle..
When You Have Black Spots on Your Credit Report
Renancing is a delicate balance even for people with impeccable credit. If your FICO report is
less than pristine, lenders simply arent going to offer the most advantageous terms on a new
mortgage and without those best-available terms, renancing wont work out in your favor.
When Your Current Lender Charges a Big Break-Off Fee
When it comes to renancing fees, its not just the new lender you have to worry about. Your
original mortgage might carry signicant break-off fees (a nancial penalty for ending the original
mortgage early). Those can be large enough to discount whatever you might have saved by
renancing otherwise.
When You Dont Have Thousands of Dollars in Spare Change
Closing costs can be expensive often mounting to several thousand dollars and that doesnt
come out of thin air. One of the great conundrums of renancing is that most people do it to
save money, but you have to spend money rst for that to happen. For homeowners with a nice
cushion in their savings account, that can be a worthwhile investment (provided renancing makes
sense by every other measure), but if paying those upfront costs will impose a short-term nancial
hardship, renancing is a bad idea.
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The Biweekly Loan Strategy
A Commonsense, Simple-Math Alternative to Renancing
If renancing isnt right for you, youre not alone. Favorable terms that justify the cost of renancing are hard
to come by, and even if you nd them, most people dont have a substantial surplus on hand to cover the
closing costs and other fees.
But renancing isnt the only option. There are other strategies that shorten the life of a loan while also
reducing the amount of interest paid over time. Aggressively paying off the loan is one such option, of
course, but thats a not realistic course of action for most homeowners. Another alternative is a Biweekly
Loan Payment Plan, a particularly attractive option because it doesnt add a dollar to the amount borrowers
pay on the mortgage every month.
A Biweekly Loan Payment Plan is a novel approach to debt elimination that simply involves dividing a
monthly payment in half and paying it every two weeks instead. Its an idea so simple and mathematically
sensible that its almost surprising it hasnt always worked that way. But as renancing is increasingly
acknowledged in the media as over-popular and often unwise, more and more people are turning to a
Biweekly Loan Payment Plan.
Heres how it works. Imagine your monthly mortgage payment is $1,200. Instead of paying $1,200 at the end
of every month, you pay $600 once every two weeks instead. How can that make a difference? Actually, its
just good clean math:
Every time you make a payment, theres less principal against which the bank can
charge interest. When you make half-payments every two weeks (instead of one full
payment a month), your principal grows incrementally smaller twice a month instead
of just once. Accordingly, interest charges start shrinking almost immediately.
Because there are 52 weeks in a year but only 12 months, paying biweekly will result in
26 payments (52 / 2) instead of 24 (12 x 2). Technically, youre making an extra
months worth of payments, but because its spread out biweekly over the course of a
whole year, you never feel the sting. Youre still paying the very same amount every
month, but this way, you get more mileage out of your money.
Heres the only catch: you have to be extremely disciplined about making your
payments biweekly every single time, without fail. You also have to call the bank
after each biweekly payment and make sure theyre applying it to your principal and
not to future payments (theyll often do the latter by default, which is considerably
less helpful to your mission).
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Of course, most people simply dont have the time or dedication to see a strategy like that through on their
own. Many try with the best of intentions but end up stretching two weeks into three, and so on. Within
a month or two, theyre right back to making month-to-month payments again, which wont get them
anywhere fast.
When it comes to any kind of debt, the best strategy is to put it behind you as quickly as possible. But true
freedom from your mortgage requires a bold decision to do what it takes, especially when renancing
isnt practical.
Fortunately, loan payment plan service providers like US Equity Advantage have simple, customizable
plans that get people on a Biweekly Loan Payment Plan program and keep them there until their mortgage
disappears and they own 100% equity in their home.
US Equity Advantages leading loan payment service is AutoPayPlus, which makes homeowners biweekly
mortgage payments for them on a regular schedule and then follows up with the bank/lender after each
payment to ensure that the funds are applied toward principal rather than future payments. Once a borrower
signs up with AutoPayPlus, they can take their mind off their debt, knowing that its steadily being paid off
with an ever-shrinking interest and balance. And the programs PaymentPlus Guarantee makes sure the
consumer never faces a penalty for missed or late payments.
A one-time fee of $399 gives consumers lifetime membership in the AutoPayPlus program for use with
an unlimited number of loans, whether its a mortgage, student loan, credit card, etc. Its even available for
making utility payments and other non-interest-accruing obligations. And because US Equity Advantage
doesnt require an upfront payment, the $399 can be deducted over time from the initial payments made
toward your mortgages principal. Its an incredibly sensible way to expedite your mortgage payoff without
renancing a dime.
When you pay a half a payment every two weeks, keep in mind that there
are 26 two-week periods in a year. Youre paying 26 half payments.
Twenty-six halves equal 13 wholes. Youre paying an extra payment each
year. Thats why your [loan] pays off eight years early.
Dave Ramsey, The Dave Ramsey Show
Page 11 | US Equity Advantage | Apr 2014 | Refinancing Rethought
Unlike some other do-it-yourself methods, AutoPayPlus offers:
Faster payoff for your entire mortgage
Huge interest savings (many homeowners literally save tens of thousands of dollars
in total interest accrued)
Every payment submitted on time guaranteed
Consistent follow-through with the lender/bank to make sure theyre
putting your payments where they count
Access to a USEA loan representative for advice
Multilingual customer service
Cancellation at any time with no fee
Customizable payment plans to match your budget and needs
AutoPayPlus is an easy way to put the Biweekly Loan Strategy to work for you. Biweekly debt elimination is a
proven approach that has been embraced by everyone from Dave Ramsey and Clark Howard to David Bach
and Suze Orman.
Stop paying untold thousands in interest charges. Take ownership of your own home and decide to eliminate
your mortgage once and for all. Enroll in AutoPayPlus and start securing your own nancial future today.
Living in a house you own with total freedom from debt
thats the real American Dream.
Page 12 | US Equity Advantage | Apr 2014 | Refinancing Rethought
Rethinking Renancing
Theres More Than One Way to Be Free
Renancing is all the rage, but whats popular isnt always whats smart. It all depends on your nances, and
everyones situation is unique. Sometimes renancing works out in the homeowners favor and sometimes it
doesnt. But in any scenario, its always a wise strategy to get rid of debt A.S.A.P.
The truth is, until your mortgage is paid off, you dont own your house the bank does. And to some extent,
they own your nancial freedom too, because those monthly payments and interest charges arent going
away. But it is possible to beat the banks at their own game.
A Biweekly Loan Payment Plan is a straightforward concept, but its simplicity is what makes it work so well.
With just a little bit of clever calendar-setting, this effective strategy puts the rules of basic math to work in
your favor. It empowers you to change your life without changing your lifestyle.
When you sign up for AutoPayPlus from US Equity Advantage, you take that critical rst step toward the real
American Dream. AutoPayPlus does all the rest, managing your Biweekly Loan Payment so that you never
miss a payment and never get off track. All you have to do is split the payment youre already making in half.
Who knew that simple math could set you free?
Page 13 | US Equity Advantage | Apr 2014 | Refinancing Rethought
About US Equity Advantage
Founded in Orlando, Fla. in 2003, US Equity Advantage (USEA) is the industry leader in biweekly and early
loan payoff services, from home mortgage and student loans to credit cards, automobiles, and more. USEAs
customers enroll as lifelong members in order to strategically eliminate an unlimited number of loans or
other debts. Members receive superior service with a flexible, customizable debt payment plan that can dra-
matically reduce interest charges and rapidly pay down principal for faster debt elimination.
US Equity Advantage is the exclusive provider of the life-changing AutoPayPlus service, which administers
members biweekly loan payments for them, guaranteeing that they never miss a payment or get off track.
To date, USEA has safely and securely transmitted more than $700 million on behalf of its members. The
company is committed to helping consumers reduce their debt, save for the future, and reach their
financial objectives. To date, USEA has worked with hundreds of thousands of members to do just that.
To try US Equitys commonsense, simple-math approach, sample the USEA Biweekly Loan Calculator
for free online.
For additional information, visit www.usequityadvantage.com, call 800.894.5000, or nd USEA on
Facebook or Twitter (@AccelerateLoans).
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Eight years is offered only as an example. Every situation is unique, and timeframes and results vary.