Money Talk: Consider these factors before refinancing loan
November 8, 2009
Dear Liz: When does it make sense to refinance a home? I have a 30-year, fixed-rate jumbo loan. The loan is just over 2 years old with a rate of 6.5 percent. Should I refinance to 5.75 percent with zero points? I make extra payments every month with the intention of paying the loan off in 15 years, but I don’t want to be locked into a 15-year rate in case I have some difficult times.
Answer: There are no hard-and-fast rules about when to refinance. When refinancing costs were higher, you typically needed a 2-point drop in rates for a new loan to make sense, but that’s no longer true.
Generally, though, you should avoid refinancing if the new loan wouldn’t recoup its costs within two years. Although the loan you’re considering doesn’t charge “points” — a percentage of the loan paid to lower the interest rate — you’ll still be charged other fees. If the lower payments would offset those fees within 24 months, and you plan to stay in the house at least that long, you might consider replacing the loan.
Another factor to consider is how much longer you’ll remain in debt with a new loan and how close you are to retirement. Ideally, you’ll want to be mortgage-free by the time you quit work.
When you’re just a few years into your loan, as you are, this is less an issue than if you’ve paid down your mortgage for five or more years. In the latter case, you should either consider opting for a shorter loan — 15 or 20 years, say — or make extra payments on a 30-year loan if you otherwise wouldn’t pay off the mortgage by the time you’re ready to retire.
Dear Liz: You recently wrote that adding a child as an authorized user on the parent’s credit card can help your children with their credit scores.
This didn’t work for my daughter. She has been an authorized user for a few years and is trying to get her own credit card and can’t, because she has no credit reports or credit scores.
It is a shame that the honest people suffer for what has happened recently in the financial world and now young people who will pay their bills don’t even have a chance! She even has her own checking account and that doesn’t help. She is now 19.
Any advice on where to go or what to do?
Answer: The financial crisis and credit crunch have made it tougher for many people to get credit, but your daughter still has plenty of options.
You first should call the credit card company and ask if it will export your good history with the credit card to your daughter’s credit bureau files. Not all issuers will do so, but it doesn’t hurt to ask. If this issuer won’t export the data, check with your other card issuers to see if they will.
If that doesn’t work, your daughter can get a secured credit card to help build her credit history. Borrowers make a deposit with the issuing bank of $200 to $1,000 and get a card with that much credit. She can find secured card offers at www.cardratings.com and www.creditcards.com.
She should use no more than 30 percent of her credit limit at any given time and pay off her balances in full and on time every month.
Dear Liz: We keep hearing about credit card companies imposing exorbitant interest rates. Are there no more usury laws? How do they get away with it? The recent credit card consumer legislation is just a slap on the hand.
Answer: You’ve dated yourself just by using the word “usury.” The short answer is that no, there are no longer effective laws limiting the interest rates credit card companies can charge. A U.S. Supreme Court decision in 1978 pretty much negated state usury laws.
The credit card reform act will limit when issuers can raise rates but does not cap them.
Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the “Contact Liz” form at www.asklizweston.com.