Things to consider before you talk to lenders.
Maximizing the benefits of homeownership is important for all Americans. But particularly for African-Americans – whose homes are a primary source of wealth.
African-Americans tend to spend a higher percentage of their monthly income on mortgage payments. So, refinancing – to have more disposable income, save and/or invest – is a popular alternative.
At first glance, refinancing seems like any easy win. It’s marketed as a way to take advantage of lower interest rates and have lower monthly payments.
But there is a caveat: Over the long term, you may actually pay more due to increased closing costs and extending payments over a longer period of time.
For instance, in the short term, reducing a monthly payment of $1,200 a month to $1,000 a month seems ideal. But, maintaining your current mortgage and paying $1,200 a month over five years (which totals $72,000) ends up being actually less than the refinanced rate of $1,000 a month for 10 years which totals $120,000. There are various web resources such as Bankrate.com to assist in these types of cost-effective calculations.
If you decide refinancing saves you enough money, try not to accept the first offer you receive. There can be wide variation between different lenders and their rates, a difference that can translate into thousands of dollars over the long haul. You might also find that you can negotiate your rates if two different lenders are competing for your business. And don’t forget to check to see if you qualify for a government refinance program.
Aside from a lower interest rate, one of the most common reasons to refinance is to switch from an adjustable-rate mortgage to a fixed-rate mortgage. Generally, this makes the most sense when the interest rates are very low. Though interest rates are generally higher for fixed-rate loans than adjustable-rate loans, it also means that your rate and the amount you owe stay the same even when interest rates go up. Entering an affordable mortgage verses one that can exceed your income should not be underestimated.
If you have questions about refinancing and want to speak to an expert, the U.S. Department of Housing and Urban Development has an online database of government-approved housing counseling agencies searchable by state.
Refinancing – just like all financing – can be a tool in strengthening your economy; but it should be approached with the same caution as entering into a mortgage. It comes with significant pros and cons, both of which should be carefully weighed before making such an important decision.
Dedrick Asante-Muhammad is the senior director of the NAACP Economic Programs. To learn more about preventing foreclosure and personal finance, check out the NAACP Financial Freedom Center Facebook Page or on Twitter @naacpecon.
The opinions expressed here do not necessarily reflect those of BET Networks.
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