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Refinance

So many homeowners rush to refinance when rates decline. They shop, look for the lowest rates and lowest fees but while wrapped up in all the shopping frenzy, they could be missing the big picture. A home mortgage is typically the largest financial transaction that individuals make in their lifetime. While price is important, the paramount element of securing a home loan is the strategy of the program and how it fits into your life plan.

The vast majority of homeowners will secure their mortgages based solely upon the interest rate then wonder how to work their financial goals around it. Since there are literally hundreds of mortgage plans to chose from, the far wiser approach would be to begin with the end in mind. First, have a long-term financial strategy in place. Then you can find a mortgage that fits into and helps achieve the goal of that plan.

Just like the lost driver who refuses to ask for directions, most families do not have a financial roadmap to reach their goal or destination. They just "hope" that things will "work out". When your children's college education, your financial freedom or quality of life after retirement hangs in the balance, you can't afford to just "hope".

Let's take an example:
We often see someone refinancing to save $200 per month. They decide to do this not because they are struggling to make ends meet but because it simply would be foolish to throw that money away. After figuring the after tax effect of the $200 savings, the net for most families would result around a savings of $140 per month. Unfortunately, there isn't a lot you can buy today with that. Most borrowers would simply spend the additional monthly savings and not have much to show for it in the long run.

Consider that many long-term professionally managed financial plans can achieve a long-term rate of return of 12%. This rate of return would cause a lump sum to double every six years. Okay, back to our borrowers who would save $200 ($140 net of tax benefit) per month by refinancing. Let's assume they have a very young child and have not yet put together a college savings plan. They could, at current rates, borrow $30,000 more and still keep the same monthly payment that they currently have. If invested with a professional money manager of financial planner, that money could double in six years bringing the total to $60,000 (assuming a 12% rate of return). Six years later, the total would double again equaling $120,000. Add another six years and the total would be $240,000 in 18 years. Now that's a great way to get your child off to college!

The above example, while realistic and based upon historic returns, does not provide a guarantee that the results will be as illustrated. But even if only half of the sum were achieved, the total would still be a handsome $120,000 accumulation. That's still far better than the net $140 per month that would likely be spent without a plan.

It seems so obvious to have a solid financial plan before deciding on such a large monetary undertaking such as a home mortgage. If you are not a Dentist, would you attempt to perform a Root Canal on your spouse? (I am not asking if you want to). The obvious answer is no. Why then do so many homeowners go so for such a long period of time without consulting a financial planning expert before making major financial decisions? That financial planning expert can sometimes be your Mortgage Loan Representative, but check first to make sure they have the expertise to help guide you along the way.

This article is based on information and research from articles written by Barry Habib


 
 
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