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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Refinancing before a move
Dear Dr. Don,
I'm considering refinancing my home that I have
been in for five years, but I'm also trying to move within the next
year. Please advise if refinancing would be the best thing for me
to do, or should I do a home equity loan?
Angela Alternatives
Dear Angela,
What's your goal in refinancing? Are you trying to consolidate debts
by using the equity in your home to pay down other debts, or are
you just trying to reduce the interest rate on the mortgage?
The less time you plan on being in the house, the
harder it is to make refinancing with a first mortgage work. That's
because the closing costs associated with a first mortgage are steep
enough that you won't be able to recoup those costs in a few months.
A mortgage refinancing calculator can help you determine how long
it will take to recoup your closing costs and decide whether refinancing
can work for you. Bankrate.com has a refinancing
calculator that will let you crunch the numbers.
If you're tapping your home's equity to pay off credit
cards or other bills, keep in mind that the loan must be repaid
when you sell your house and you won't have as much money available
for a down payment on your next house. You could be required to
pay PMI (private mortgage insurance) if your down payment is less
than 20 percent of the new home's value.
While there are ways to avoid paying PMI, such as
getting an 80-10-10 mortgage, using a home equity loan for debt
consolidation when you plan to sell the home in less than a year
can reduce your financial flexibility when it comes time to buy
the next house.
If you do decide to take out a first or second mortgage, you should
review the loan documents and make sure there won't be a prepayment
penalty if you pay off the note early.
-- Posted: March 3, 2004
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