Refinancing

Homes & debt

Homes

To save money, you should stay in your house longer than the break even period. The larger the spread between the new interest rate and the rate on your existing loan, the shorter the break even period. The break even period– the period over when the interest savings just overtakes the refinance costs. The method I prefer is to compare all costs of your current mortgage and a new mortgage over a future period. The period should be your best guess as to how long you will have the new mortgage. If the total costs are lower with the new mortgage, you should refinance.

Yet watch out the break even period is not the cost of the new loan divided by the reduction in the monthly mortgage payment.

Is a Refinancing a Good Deal if it Saves Money? No, but neither can I tell you that it is a good deal. I don't know enough to make this call. Neither do you. But what I do know makes me extremely skeptical. A "good deal" is a new loan that is priced as well or better than any other new loan that you can find in the current market. This is the same definition you would use if you were shopping for an automobile, a computer or a mousetrap.
The problem with defining a "good deal" in terms of the savings from a refinance is that such savings depend on the rate on the old loan as well as the rate and upfront charges being offered on the new one. By this definition, if your old loan had a rate of 8.75%, the deal offered would be even better! This makes no sense. Your focus should be on whether or not you could do better dealing elsewhere.

Questions to ask:

1) What is your current interest rate?
2) What is the current market interest rate?
3) Is the rate fixed or variable?
4) How long do you plan to stay in this home?
5) Do you have cash available for the closing costs?
6) Is the value of your home increasing, decreasing, or staying about the same? What are the short term and long term prospects for the value of your house?

Sometimes lenders advertise a temporarily discounted rate for home equity lines -- a rate that is unusually low and often lasts only for an introductory period, such as 6 months. Variable rate plans secured by a dwelling must have a ceiling (or cap) on how high your interest rate can climb over the life of the plan. Some variable rate plans limit how much your payment can increase and also how low your interest rate can fall if interest rates drop. Some lenders might permit you to convert a variable rate to a fixed interest rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan. Agreements generally will permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable rate plans might not allow you to get additional funds during any period the interest rate reaches the cap.

Often businessmen will look around trying to encourage every home owner they can find to refinance their home. In 2002 an Australian millionaire was touring the UK claiming anyone could make money to retire within 5 years. Yet he was a conn man getting people to put their livliehood at risk.

In 2001 Citigroup noted profits rose at its consumer division - up 27% to $1.16bn (£799m) - amid a surge in home buying and a boom in home refinancing. Declining interest rates, a result of nine interest rate cuts by the US central bank, have not only resulted in increased profits but reduced costs for many banks. But declining interest in the stock market among individual investors has affected the investment bank operations of these firms.

In 2002 the USA HOUSING BOOM 2002 encouraged refinacing House prices increased by 7%; Home owners withdrew $200bn by refinancing their mortgages at lower rates ; Home owners made $350bn in profit by selling homes ; Home owners took $130bn by increasing mortgages

Refinancing debt

The raising of new money by a company in order to pay off existing debt. This is something that borrowers do all the time, and it does not signify trouble.

Debt restructuring is a more fundamental process, often involving the conversion of debt into equity. Often a company in serious financial issues will try to reorder it's debt to make the debt payable over a longer period of time, or to ask for some of the debt to be canclled. Many soccer clubs in the UK have had to refinance.

In 1999 Sir Elton John was reported to have asked a merchant bank to help him borrow £25m ($40m) to pay off a huge accumulation of debts in the UK and the USA. The 52-year-old pop star, who has a reputation for a lavish lifestyle, is said to have approached Samuel Montagu - the private finance arm of HSBC - to arrange a deal which would allow him to use future earnings from his music as security for the loan.
Sir Elton: Not the first pop star to cash in on future earnings
Sir Elton has an estimated wealth of £160m ($256m), including a 37-acre estate in Windsor, a house at Holland Park in west London, other properties in the US and France and a fleet of 20 luxury cars.

The loan is likely to be secured against revenues from his hits over the past 30 years, which still bring in substantial royalty earnings.

In 2002 Britain's biggest cable company NTL has said it may run out of money to run its business while it refinances its debts. The company also reported an £8bn write-down of assets and goodwill, but posted a rise in underlying earnings to £492m for 2001.

In 2006 a report suggested refinancing of debt as health authorities in the PFI was benefiting the private sector more than the public sector. Concerns over the financing of the Norfolk and Norwich University Hospital have been highlighted in a report on private finance initiatives (PFIs). A report by the National Audit Office (NAO) says that at one time private investors made more than £80m out of the deal to fund the hospital. The hospital made only £34m from the deal. Changes have been introduced to make sure that such earnings are split equally in future. PFIs involves a partnership private firm and public organisation, and helps fund public projects with private money. Reports in 2002 by the NAO and the House of Commons Public Accounts Committee (PAC) highlighted private companies' ability to make significant sums by refinancing debts taken on for PFI contracts in order to take advantage of improved interest rates.

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