As you've watched interest rates move downward, you've probably already thought about refinancing your mortgage. But have you considered redoing your auto loan, personal loan, home equity loan or home equity line of credit?
Experts agree that the first step is to assess what you're trying to accomplish through your debt refinancing. Are you trying to get a little needed breathing room? Are you determined to pay as little interest as possible? Are you determined not to put one more penny than necessary into your banker's hands?
You also need to ask yourself why you have the type of credit you have and whether, as you go to refinance, you can better meet your needs with a different type of credit vehicle.
Finally, you need to compare the terms of your current credit with the refinancing terms to determine whether you've achieved a real savings.
"It all depends on the terms of the loans," says Doug Perry, first vice president of Countrywide Credit Industries Inc. The Calabasas, Calif.-based company is the corporate parent of Countrywide Home Loans, one of the nation's largest mortgage lenders.
A question of savings
It boils down to two questions, says Brian Reed, president of online vehicle lender
People First: "How much money am I going to save? How much hassle do I have to go through to save that money?"
Reed calls auto-loan refinancing "a well-kept secret." For instance, his company offers simple interest loans with no down payment, no application fee and no prepayment penalty. "Unlike refinancing a home, you don't have all the documents and the appraisal process" to contend with, he says.
If there's no prepayment penalty on your existing auto loan, and you plan to keep the car for several years, then it would make sense to chase today's lower interest rates. Even a $10 reduction in your monthly payment can save hundreds of dollars over the course of the loan.
It's also important to know what you're going to do with such small monthly savings.
"Whatever you refinance, if you're going to take the savings (from lower payments and lower cumulative interest) and fritter it away, you might as well have left well enough alone," says Nancy Castleman, co-author of
Invest in Yourself: Six Secrets to a Rich Life.
She advises people that with the volatility of the stock market today, individuals are better off investing in their debt, which is what public companies do when they buy back their own stock because they feel it has been undervalued in the market.
However, she says, individuals should be wary of extending the term of their debt solely in return for a lower monthly payment. After refinancing to reduce the payment, people tend to send in only the amount required, she says. "If you just send in what you've sent in all along you can triple the benefits of refinancing" by reducing principal much more quickly, Castleman says.
Go after high-cost, long-term debt
Consumer advocates agree that the best debt to refinance is the highest-cost and longest-term debt because refinancing those offers the most return for the effort.
"The average family must have about eight grand in (unsecured) credit-card debt" most of it carrying double-digit interest rates, she says. That's why she urges individuals to focus on getting out of "credit card hell."
She recommends chasing
low-interest rate credit card offers, reading the fine print to be sure there are no hidden fees that would diminish the payback, and transferring balances to low-interest cards. Use Bankrate.com's
credit card search engine to find the best card for you.
If you have a good credit history, you also could ask your current card company to meet or beat a low-interest offer from another company, Castleman says. "They know it's harder to get a new customer than it is to keep an old one."
Alternative strategies to reduce credit card debt include other kinds of refinancing. If you decide to refinance your first mortgage, for instance, you may be able to roll your credit card debt into the new mortgage and come away with a single payment and interest rate that is much lower than what you had been paying.
There's a further potential savings in going this route because credit card interest is not tax-deductible, while mortgage interest generally is. Check with your tax adviser if you investigate this option.
Beware the penalties
On first mortgages and on fixed-rate home-equity loans, you need to check whether you face prepayment penalties and loan-origination fees that outweigh your return.
Perry and Castleman agree that old rules of thumb about refinancing don't apply anymore.
The old mortgage adage says that you need at least a two-point reduction in the interest rate to make a refinancing worthwhile, but Perry says, "as loan amounts have gotten larger, you can see reductions of 1 percent and sometimes a little less leading to a real good reduction" in your payout. This means the consumer has to do more research and ask for creative advice from loan officers. Use this
refinancing calculator to review your numbers.
Home loans and lines of credit
If you have a fixed-rate home-equity loan, you most likely have a shorter term than your first mortgage and you've got the security of having your interest locked in as well as any potential tax savings from an interest deduction, Perry says.
If you want to preserve those advantages, you next have to weigh whether the interest, origination fees and any penalties would make a refinance worth your while, he says. You also have to examine whether it would make more sense to roll that debt into a refinancing of your first mortgage.
For most purposes, though, Perry favors the home equity line of credit, known in the industry as the HELOC. Because they generally carry lower, adjustable interest rates based on the prime rate plus a number of points, there generally is no need to refinance them to take advantage of lower interest rates, he says. They take care of that by themselves.
Because it's a revolving line of credit, your required monthly payment varies as you pay down the debt or as you make purchases with the line. Some people use HELOCs to finance big-ticket purchases such as boats, cars and home improvements, he says.
However, if the equity in your home has increased and/or the margin of points above the prime has gone down, then you may want to consider refinancing a HELOC, he says.
Personal loans typically carry higher rates of interest and a short term, Perry says, and they offer no tax advantages. Typically, they are carried by people who don't own a home and can't take advantage of a HELOC or a home-equity loan, he says. Again, he says, the decision to refinance depends on what kind of fees might diminish your returns.
If you are a homeowner, he advises comparing the advantages of refinancing a personal loan as a home-equity vehicle rather than at the personal loan rate. Remember, though, that the costs of originating a new home-equity loan or HELOC typically include the cost of appraising the house, which can wipe out a small savings upfront.