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The Truth About RefinancingWhile your home's value may have greatly increased, you may be paying more than necessary on the mortgage.
DO refinance if your mortgage rate is at least 1/2 point higher than the going rate, says Glenn Frank, a financial planner in Waltham, Massachusetts. Use the calculator at bankrate.com to do the math (click on the "calculators" tab and then on "mortgage").
DO consider a 15-year mortgage instead of refinancing a 30-year loan. Your monthly payments may be slightly higher, but you could ultimately save tens of thousands in interest payments, says Frank.
How so? Say you have 20 years left on a 30-year mortgage charging 6.5% interest. If you have $100,000 left on the loan, your monthly payment is $746. If you refinance using a 15-year mortgage at 5.5%, your payment will be $817. But you'll have knocked five years off the loan, saving $32,000 in interest. "That's $32,000 you won't be shelling out during retirement," says Frank.
DON'T use a cash-out refinance to whisk away credit card debt. It may not pay. Assume you have a $10,000 balance on a card charging 10%. Pay it off in four years and you'll shell out $12,192. But tack the $10,000 debt onto a new 15-year mortgage charging 4.5%, and you'll spend all those years paying off the loan for a total of $13,860.
True, without the card's debt you'll have an extra $177 a month. But the trade-off works only if you save that money, ideally in a 401(k) or IRA, says Frank. It's also a bad move if you rack up another credit card balance. "Then your house is a giant credit card, serving as collateral for that debt," he says.
Plan for Financial Aid
Most parents don't save nearly enough for children's education. "Only two of my 5,000 clients had saved what they needed," says Milton Eisenhardt, director of counseling services at College Money, a college-planning group in Marlton, New Jersey.
DON'T assume that investing in a 529 college plan is the best place for your savings. While a 529 plan offers tax-free growth and withdrawals for college costs -- and in some cases a tax deduction -- colleges look at these savings when sizing up eligibility and how much they'll fork over. The same scrutiny is given funds saved in a Coverdell IRA and in an account opened in your child's name.
DO save aggressively for college in a taxable account in your name if your household income is below $100,000. In this case, your child will likely qualify for some financial aid, says KC Dempster, College Money's program development director. Collegemoney .com offers a free quiz that helps you determine your eligibility for aid.
DO invest in a 529 savings plan if your income is higher than $100,000 and will likely remain at or above that level when your child enters college, says Dempster. In this case, the 529 plan is great because you probably won't qualify for financial aid anyway.
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