Decide When to Refinance
Q: How do I decide whether it makes sense to refinance my mortgage at a lower interest rate?In this example, imagine that you're refinancing a $160,000, 30-year fixed mortgage that is currently at 6.5%, into a 30-year fixed at 5.5%. Your current payment is $1,011 and you have 25 years left on your mortgage.
A: Start by doing a cost-benefit analysis. A step-by-step guide:
- Ask your lender to give you a detailed breakdown of closing costs, which are usually 2% to 4% of the total loan, and typically include an application fee, appraisal and inspection fees, credit check, and attorneys' fees.
- By refinancing, you will lower your payment. Ask your lender what that lower amount is.
- Divide the refinancing cost by the monthly savings--$3630 divided by $103 = 35.17. That's the number of months that you would need to remain in your house to break even.
In this example the approximate closing cost would be: $3,630
By refinancing, your monthly payment would drop by $103 to $908.
You would have to live in the house for about 35 months—or three years—to break even on what you spent refinancing.
If you plan to in your house for less than three years, it doesn’t make sense to refinance your mortgage. Use this calculator to do your own ballpark estimate.
Other considerations:
- By refinancing, you start from scratch; thus you pay mostly interest and little principal on your loan for several years.
- Still, you would about $23,557 in interest over the full term of the loan (i.e. 30 years).
- If you're not going to stay in the house long enough to pass the break-even point AND reap some of the interest gains (say, 10-15 years), then a refi would only serve to lower your monthly payments.
Ways to Avoid Foreclosure
Foreclosure rates are at an all-time high: nearly a million homeowners faced the big F in the third quarter of 2009 alone. Millions more are on the brink, because of epic job losses and plunging home values.
If you're finding it hard to meet your mortgage, there are preventive steps you can take, but you must act now to get the snowball rolling.
- Get counseling. A recent study by the Urban Institute found that at-risk homeowners who got counseling were 60% more likely to avoid foreclosure—largely because counseling helped them get loan modifications. Call the HOPE hotline: 888-995-HOPE (4673) www.hopenow.com or go to the HUD website's resource page.
- Consider a short sale. In a short sale, your lender agrees to accept less money than what you owe. The trick is getting your lender to agree to this arrangement—and then finding a buyer willing to do a short sale purchase, which can take months.
Lack of Renters Insurance Could Burn You
Christa is a product developer and writer based in NYC, and loves when art and business come together in equal amounts in her life. You can find her on Twitter, on Curating a Creative Life, her own blog about creativity, and as a weekly contributing writer to The Journal of Cultural Conversation. We first met Christa when she covered DailyWorth for Examiner.com.
Got renters insurance?
No?
On the Saturday of Labor Day weekend, my apartment building caught fire, burning through three floors. I was on the 4th floor of a walk-up, no fire escape, no smoke alarms going off, buying iTunes on my laptop in my kitchen. As I was listening to Fleetwood Mac sing “Well, I’ve been afraid of changing ...” the kitchen floor started crackling. The adhesive that attached my kitchen tiles to my floor started to heave. I thought that the crew renovating the apartment below me was just working on the ceiling of that apartment. 
I had just gotten out of the shower so with sopping wet hair in my hang-around-the-apartment clothes, I grabbed my keys and intended to go downstairs and tell the contractors they were messing up my kitchen floor. I got halfway down the first flight of stairs and was completely consumed by black smoke so thick that I couldn’t see my hand in front of my face. » Terrifying. A few more minutes and I would have been trapped in my apartment with no way out. I got as low as I could, scrambled down the stairs, screaming, praying I wouldn’t die of smoke inhalation. Little did I know that I was running right by the very apartments that were burning. I’m lucky that I didn’t run right into the flames on the stairs or that the stairs themselves didn’t give.
So here’s what I learned that you need to know:
- Please buy renters insurance. Please. You may never need it, and you never know what your neighbors are doing in their apartment. I filed my claim on-line with Liberty Mutual in five minutes, they arranged for the movers, the fire restoration company, and the value assessment of my belongings. I received my first installment of the claim in a month, and the remaining amount will be to me in a few weeks. With any kind of building incident, the landlord is only responsible for the building itself, not your belongings. I have my policy through Liberty Mutual and I pay $181 a year for $25,000 worth of coverage. A bargain when you consider the stress and financial loss an incident like this can cause. And your belongings are insured wherever they are in the world. Worth every penny.
- Know your rights as a tenant. If there is an order issued to vacate or if the building is declared uninhabitable, you’re out of your lease. If not, then the situation is trickier legally. I have a close friend who is an attorney (and a darn good one) so her counsel and advice on how to handle my landlord really helped me. Get in touch with your city office over housing and read your rights carefully. In New York City, visit http://www.nyc.gov/html/hpd/html/tenants/tenants.shtml.
- Cash. You need that emergency fund. I am extremely fortunate in that I have a very good job and am a miser who saves 20% of my take-home income. I have not invested too much in the market so I had a stockpile of money in my savings accounts. This was critical to my peace-of-mind during this transition. At one point, I was out of pocket 6 months rent: 2 months from my apartment that I just moved out of (my deposit had not yet been returned by my landlord), my September rent and security from my fire-ruined building (I haven’t gotten that back yet), and the security and one month’s rent for my new place that I moved into after the fire. I needed to buy new clothes, new furniture, new just-about-everything, and if I didn’t have that cash, I would have had to wait for the claim. I was very lucky that Liberty Mutual took care of me so quickly. And in this kind of situation, you can’t count on luck.
- Mobilize your network of friends, family, and co-workers. People want to help people in a jam. Whether it’s someone to talk to, someone to tell you about an
available apartment, someone to borrow some clothes from, or some place to stay temporarily, let people help you. I don’t take help easily. I pride myself on making “self-preservation a full-time occupation”. You can’t do that when things like this happen. You need people and they want to be there for you. Let them. I got on Facebook, Twitter, every on-line community I belong to, and sent a mass email to everyone I know telling them what happened. I had a new apartment in two days, in my same neighborhood, no broker fee, in my price range, available immediately, and much better space than I had before. This would never have happened without a lead from a friend.
- Your belongings, no matter how precious, are just stuff. Your health is the critical element in every situation. If you’re breathing, count your blessings. And to make getting you belongings replaced easier, take digital pictures of them and save receipts. The insurance company can replace it all. You are irreplaceable. Remember that.
Q&A: Affording Your First Home
Q: I am a 23-year-old professional, and I'm eager to buy a home. I just landed a new job with great pay and benefits. What's your advice to a young woman ready to spread her wings? {
A: First, you need to decide how much home can you afford.
It's not an easy question. But figuring it out can be fun—in a treasure-hunting sort of way. Let's start with three of the most important factors that will drive your purchase: - The estimated price of the home you want.
- The target amount of your down payment.
- How much you can afford to spend each month on ALL the expenses relating to home ownership.
Although you may know, say, what a one-bedroom condo is likely to cost in your area, you'll need to call a realtor to find out the maintenance charges, fees and property taxes.
Next, determine the amount you can save each month. If you can sock away $700 a month, it will take you at least 21 months to save a $15,000 down payment. Reality check, right?
Now, experiment with a mortgage calculator like this one.
If you earn $50,000 and put down $15,000, that could enable you to buy a $154,000 home, with a 30-year fixed mortgage of about $139,000, and an $1,166 payment (including insurance, taxes).
Can you afford that much house? Remember: You need to save a few thousand for closing costs. And if your down payment is less than 20% of the purchase price, you'll pay an extra sum for private mortgage insurance (PMI) each month. If you're buying a condo, factor in maintenance or building charges every month, too.
So, with a salary of $50,000 -- and approximate take-home pay of $35,000, or about $2,900 per month -- a mortgage payment of $1,166 leaves you only $1,750 to cover all your other expenses.
Ideally, your monthly payment should be about a third of your income. So start over: reconsider your target price, or making a bigger down payment, until the numbers add up to what you can afford comfortably. Happy treasure hunting!
Here's a great chart that detailing how much you can afford, broken down by salary level.