Should You Refinance Your Mortgage? Here's What Suze Orman Thinks
- Suze Orman has spoken favorably about mortgage refinancing.
- She believes refinancing can save people money if they can drop their rates.
- But, she urges borrowers not to extend their repayment timelines too much.
Suze Orman is a fan of refinancing, but only under certain conditions.
The decision to refinance your mortgage can have major financial consequences.
When you refinance, you get a brand new mortgage loan. The proceeds from that new loan are used to pay off your existing mortgage. As a result, you can change the terms and conditions of your home loan, with your new refinance loan ideally offering more favorable terms.
But should you actually move forward with making this decision? While that's a hard question to answer, finance expert Suze Orman provides some advice that could be helpful in making your choice.
Here's what Suze Orman thinks about refinancing
Orman has spoken favorably about mortgage refinancing, even suggesting that some readers and listeners should definitely move forward with getting a new home loan.
She has outlined three conditions that need to be met in order to refinance. Orman believes you should refinance if:
- You can reduce the interest rate on your current mortgage loan by refinancing.
- You can decrease your payoff time or keep the same payoff time as your current loan.
- You're going to be in the house you own for long enough to cover upfront costs of refinancing.
Orman warns "it costs money to save money when it comes to refinancing," since you need to pay upfront closing costs. These could equal as much as 2% to 5% of your loan amount.
However, she's stated that it's often worth it to pay these fees if it helps your finances in the long run. "If refinancing is what it costs you to save money, and possibly shorten the term of your mortgage, I would absolutely go ahead and do it now," she said.
Orman's rule for refinancing
Although Orman believes refinancing can save people money, she also warns that many people who go through the process of getting a new home loan make a mistake when they do it.
"The big mistake is that after spending years paying down their existing 30-year mortgage, people then refinance into a new 30-year mortgage," Orman warned on her blog. She described this as "so wrong" because extending your loan repayment time can mean you end up paying more interest over the life of the loan even if you drop your rate. And, by refinancing into a longer-term loan, you're in debt for longer and have your money tied up for more years.
To avoid this, Orman suggests you shouldn't extend the total payoff time of your loan beyond 30 years. So if you have 20 years left on your original 30-year loan, she'd be a proponent of refinancing into a 15-year or 20-year loan but not another 30-year loan.
If you refinanced into a new 30-year loan, you'd be paying your loan for 10 extra years, so it would end up taking a lot longer to be debt free. That extra 10 years of payoff time could mean getting stuck with much larger interest charges.
Orman is right about being cautious about extending your payoff time, so it's absolutely worth heeding her advice when making a decision about whether refinancing your home is right for you.
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