Should I Refinance?

If you’re a homeowner, you may have noticed that mortgage rates have been on the decline recently and that probably means you’ve been hearing about how it’s a prime time to refinance.

People refinance for all sorts of reasons:

  • Lower interest rates, which can help you save on total interest paid over the life of the loan.
     
  • A lower monthly payment, which can make what you owe month-to-month a bit more manageable, but you may end up stretching the loan term to a longer time period and therefore owe more in interest overall.
     
  • A shorter term, which helps you save on interest but could mean a higher monthly payment.
     
  • A fixed interest rate, refinancing from an adjustable-rate mortgage to refinancing to a fixed-rate mortgage before their original interest rate adjusts.
     
  • Tap into your home equity, refinancing to tap into equity and do things like renovations.

But as with any financial decision, you need to understand how refinancing works before rushing into a decision.

How does refinancing work?

When you refinance, you are essentially taking out a new loan to pay off the old loan.

Keep in mind that you’ll likely have to pay closing fees – about 2 to 4% of the total amount you borrow – which can vary depending on the size of the mortgage and the fees you’ll be charged.

It’s always better to have cash available to pay the closing costs, but you may also be able to wrap in the closing costs in with the new mortgage.

Questions to ask yourself before refinancing

How long do I plan to stay in this home? If you’re only planning on living there for a few more years, the cost of refinancing may not be worth it. You’ll want to calculate your break-even point: how many months you need to remain in your home before the monthly savings on the new loan exceed the closing costs you’d have to pay. 

How much equity do I have currently? As you make mortgage payments and your home’s value changes over time, the amount of equity you have in the home will also change. Many lenders prefer you have at least 20% equity in your home before you refinance. Some will approve you with less, but you may not get the most favorable terms.

Am I currently paying for PMI? If you have a loan with Private Mortgage Insurance (PMI) and have at least 20% equity, refinancing to a conventional loan may allow you to drop the monthly PMI payment. You may also be able to get rid of PMI by having the home reappraised too, which is much more affordable than refinancing.

How close am I to completely paying off my current mortgage? If you’ve been paying on your mortgage for a while and only have a few years left, it may not make sense to refinance. No sense in trying to save on interest when you’re so close to paying it off.

What mortgage terms would I qualify for now? It might be in your best interest to refinance so you can shorten your loan term from a 30-year rate to a 15- year mortgage at a lower interest rate. Of course, you could always self-amortize the remaining payments (make extra payments to have the loan paid off sooner) if you have the discipline to do so.

How to refinance

Refinancing is just like applying for a mortgage. Go online and get quotes from a few different lenders. Choose one that is offering the refinance options you are looking for at the most reasonable rates.

Once that’s complete, you’ll pay closing costs, sign the necessary paperwork, and begin making your new mortgage payments.

Freeze Your Credit

Criminals only need a few key pieces of information — such as your name, address, Social Security number or credit card number — to steal your identity.

Choosing to place a credit freeze — or not — will depend on how confident you feel that your personal information is safe from criminals.

In a world where data breaches are commonplace, you can hope nothing bad happens to you and ignore it, or you can take action now to protect your credit and financial wellbeing.

how it works

A credit freeze prevents lenders from checking your credit in order to open a new account.

So, if a criminal has your personal information and tries to open a credit card in your name, a credit freeze will stop the lender from checking your credit and they won’t issue the new credit line. Pretty straightforward.

If you have a credit freeze in place, you must remove it to apply for credit.

The process

You’ll need to apply for freezes from all three credit bureaus for full protection. But all you need to do is visit their websites and follow a few simple steps:

I froze on my credit for each of the credit bureaus and the steps to complete the freeze was relatively the same for all three:

  1. Put in contact information
  2. Set up an account with that bureau
  3. Verify identity by answering a few questions that only you would know the answers to

I timed the process to see how long it would take. It only took 20 minutes total for all three credit bureaus.

You’ll get a unique PIN from each buruea that you’ll need to have whenever you want to temporarily lift or permanently remove your credit freeze.

Make sure you keep these PINs in a safe, but easily accessed, place in case you want to apply for a new credit card or loan. You’ll need it!

Keep in mind that freezing your credit will not affect your credit score and it’s totally free!

The only potential downside is the extra time it will take to temporarily un-freeze your credit if you want a new loan.

An inconvenience I’m willing to take for the security a freeze provides.

Freeze your child’s credit too

Parents also have the right to freeze their minor children’s credit too. The process is relatively the same as freezing your own credit, but there are a few more forms to prove that you’re the parent.

Children are cybercriminals number one targets because they have something a lot of us don’t have. A clean slate.

Pair this with the fact that most parents wouldn’t think to run a credit report on a child and you can see how they can be especially vulnerable to identify theft.

There was an expert on cybercrime at a conference I recently attended and they told a story about an 18-year-old they knew who applied for a car loan but was denied because he had $800,000 of debt and 42 credit cards tied to his Social Security number.

It turns out someone stole his identify when he was 2 years old and been using it for over 16 years.

Luckily he and his parents were able to undo the damage, albeit after two years of constantly working with the three credit bureaus.

Continue to monitor

While a credit freeze doesn’t prevent all forms of identity theft, it does add one more layer of protection.

You should still request your free annual credit report to verify the the accounts you already have open and look for any questionable activity.

I also suggest enrolling in a credit protection service and identity theft monitoring service.  The cost of these services is usually very low for the benefits – which typically includes instant alerts of any questionable activities under your identity.

What Happens If I Die Without A Will?

If you don’t have a Last Will and Testament (or more simply known as a Will) in place yet, you’re not alone. I can anecdotally confirm this through my casual observations as a financial planner.

Not having a Will is a problem because it — along with other estate planning documents — is what’s used to inform the courts of how you want your estate divided when you die.

What’s Considered My Estate?

Your estate consists of all the property you own, including real estate, personal property, bank accounts, retirement accounts, and life insurance policies.

Each of these asset types is titled in order to inform the courts how they are legally owned — individually, with someone else, or held in trust — and helps determine how to distribute them at your death.

What Happens When I Die?

When you die, your estate will go into probate, which is a legal process where your property is transferred to your heirs according to how you requested it to in your legal documents. But what if you die without a Will? Or as legal people like to put it “intestate”. Then the court gets to decide how to divvy up your estate.

Every state has different succession rules they follow. To give you a general idea of how it works, here is what it looks like in Indiana.

I am not providing legal advice. This is purely a diagram of my understanding of Indiana’s intestate succession statutes.

You Need A Will. Seriously.

As you can see, things can get complicated in a hurry. Even a simple situation like just a spouse and kids becomes problematic because half of the estate is given to the children outright. As one of my attorney friends puts it, “It’s a freaking mess and a good example for why everyone needs a Will”.

I know thinking and talking about your eventual demise is depressing but seriously, if you haven’t done any estate planning yet, I highly encourage it.

There are numerous resources on the web that can help you draft the basic documents you’ll need, however, nothing beats sitting down with an attorney to craft them with you.

By hiring an estate planning attorney, you’ll be able to avoid the pitfalls and potential headaches of trying to do it yourself. 

Catching The Big One

Many of us either fish, or know someone who fishes, and the tendency to focus on the “big one” or “the one that got away”.

There is something inherently natural about valuing ourselves for our biggest catch. Perhaps it boils down to a primal need to feed ourselves and our families — and the bigger the catch, the more we eat.

It’s not the size that matters

But, as I’m sure any honest fisherman will tell you, big catches happen very infrequently. Meaning if you rely on the “big fish” to eat, you may end up going hungry.

The better way to measure your success is the overall number of the fish you bring in the boat.

The more fish you reel in, and the more frequently you do so, the more likely you are to feed your family. And the best way to increase your chances of a catch?

Put more hooks in the water.

Increasing the odds

Having multiple hooks means you can use various baits and hook sizes, optimizing your chances of bringing in all types of fish.

This principle holds true for investors as well. We seem to overvalue the big wins and undervalue the end-goal of enhancing our long-term return.

We focus on the individual holdings that do really well (or poorly) but rarely take the time to think about how each individual holding affects the portfolio as a whole.

We focus so hard getting one big win, that we don’t take the time to bait the other hooks.

While baiting multiple hooks (creating a diversified portfolio) doesn’t guarantee a catch on all of them, it does increase the chances that you won’t walk away empty-handed.

And this is the single most important aspect of this analogy. While a diversified portfolio may not increase by 100% in a year, it also curtails the possibility of a dramatic decrease as well.

Meaning, you will be more likely to have steady returns that “feed” your portfolio continually each year.

conditions change

As an extra note, you’ll also have to account for the fact that water conditions change.

Not everything that works in one season will work in another.

Market trends and the economy are a lot like water conditions, they are always changing. It would be foolish to suggest a fisherman bait his hook and leave it in the water forever.

Most likely that bait will lose its appeal to the fish and won’t catch anything.

It is best practice to reel in your hook, check the bait, and change it out if it isn’t working.

Should I Invest In The Latest Trend?

FOMO (fear of missing out). I’m sure you’ve felt it before while being bombarded with headline after headline about everyday people striking it big with relatively little investment in the latest investment fad.

Take this one for example, “Idaho teenager becomes a millionaire overnight by investing $1,000 in Bitcoin” It’s so easy a teenager can do it!

Before you know it, you’re sucked into the hype and putting money into something you barely understand.

But whether it’s cryptocurrencies, cannabis stocks, or whatever fad is the topic of conversation right now how do you determine if you should really be jumping on the bandwagon?

Investing versus Speculating

You need to understand the difference between investing and speculating.

An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. 

Benjamin Graham, The Intelligent Investor

One of the worst mistakes someone can make is speculating with their money when they think they are investing.

The only way you can consider yourself an investor is if you develop strict investment guidelines to follow and actually understand the company you are investing in. Without that, you’re just relying on luck.

Keep Your Lizard Brain At Bay

Another thing you’ll want to be aware of is that primitive part of your brain that functions purely off of emotion. 

Our brains are hard-wired for thrill-seeking. Think about rollercoasters, haunted houses, gambling, and speculative investing. They all cause our bodies to release dopamine throughout our system which makes us feel good. 

It’s this part of your brain that is going to make it difficult to follow any investment guidelines you’ve put in place. 

Timing Is Everything

Even if you’re the next wunderkind of investing, it won’t matter much if you’re late to the game. Just look at what happened with Bitcoin a few years ago.

Early adopters — the ones who rode the wave as euphoria grew and knew when to get out — were the ones who came out on top.

Speculators who bought near or at the peak, hoping that the rise would continue, were caught with their pants down as the value plunged seemingly overnight.

Is It Right For You?

The idea of striking it big with just a little bit of money and effort is appealing. Just like winning the lottery.

But unless you on track with your financial goals, and have the disposable income to play with, I recommend focusing your efforts on the only true way to build wealth which is saving!