Money Management

Refinancing a mortgage can save a homeowner thousands of dollars in interest payments. Find out how to determine when the time is right to refinance. 

If we look at the average mortgage rates over the past five decades, we can see that today’s rates align with those historical averages. And yet, after enjoying mortgage rates under 3% in 2021, rates in the 6%-7% range are a tough pill to swallow. Those buying a home today have been hit with a double whammy — higher interest rates and higher home prices. For many of us, there’s comfort in the idea of refinancing our mortgages when the rates drop. But how do we know when the time is right?

What is refinancing?

In a nutshell, refinancing your mortgage means trading in your current mortgage for a new one. You apply for refinancing through a mortgage lender, and if approved, the lender uses the new mortgage to pay off the original loan.

Homeowners have all kinds of reasons for refinancing their mortgages, with the most popular being to land a lower interest rate.

What a lower rate can do for you

Let’s say you have $240,000 left to pay on a 30-year mortgage at an interest rate of 7%. Your principal and interest payments would run $1,596 per month. If you were to refinance the mortgage with another 30-year mortgage at 5%, your principal and interest payment would drop to $1,289. Just as importantly, the total interest you would pay over the life of the loan would drop from $334,590 to $224,024.

You might even want to take it further by refinancing the original mortgage with a new 15-year loan instead. Lenders typically offer a lower interest rate on 15-year notes, so let’s say you snag a rate of 4.5%. Your monthly payment would increase from $1,596 to $1,836 per month, but rather than pay $334,590 in interest, you’ll pay just $90,477, and your loan will be paid off in half the time.

In this scenario, simply refinancing the loan at a lower interest rate will leave you with anywhere from $110,500 to $244,000 extra. That’s money you may want to put toward other debt, your child’s education, or to build your retirement fund.

How do you know when the time is right?

Opinions vary. Some say you should consider refinancing when rates drop by 1%, while others insist rates need to drop by 2% or more. Only you can determine when refinancing is worth it for you and your budget.

Just as you paid closing costs when you took out the original mortgage, you can expect to pay closing costs when you refinance. When a lender advertises “no closing costs refinancing,” it typically means you don’t have to pull out a check or credit card to pay the costs upfront. Instead, the lender will roll closing costs into the loan balance. If you’d rather not spend years paying interest on the closing costs, you can pay them upfront.

Depending on the lender, closing costs will run between 2% and 6% of the amount you’re borrowing. For example, if you’re borrowing $240,000, closing costs could be anywhere from $4,800 to $14,400. As you can see, that’s a wide range. As you shop around for a low refinance rate, it’s equally important to shop for a lender with low closing costs.

An illustration

To illustrate, let’s use the same scenario we used above. You have a 30-year mortgage at a rate of 7% and owe a balance of $240,000. As the interest rates begin to cool, you find a lender willing to refinance at 5% with a total of 3% in closing costs ($7,200).

If you take out another 30-year mortgage, your payment drops from $1,596 to $1,289, for a monthly savings of $307. With an extra $307 monthly, you could pay yourself back for the $7,200 paid in closing costs in just under 24 months. But remember, snagging a lower rate means you’ll pay $110,500 less in interest than you would have if you’d stuck with the original mortgage. Even if you subtract the closing costs from $110,500, you still end up $103,300 ahead.

Know what you’re looking for

Those who’ve purchased a home since interest rates began to climb must determine how low they need the rate to drop before they pull the ripcord and refinance. At what point is refinancing worth it?

One way to come up with an acceptable APR is to use a mortgage calculator to run different scenarios. For example, if your current rate is 7%, refigure your monthly payment and the total amount of interest paid over the life of the loan by plugging in lower interest rates. Then, determine the highest rate at which you would be comfortable refinancing.

It’s important to remember that it could be many years before interest rates drop to your “dream rate,” so decide what would be an acceptable number. That’s when it’s time to check rates daily and follow trends. Once the rate hits your target, it’s time to begin shopping for a new mortgage.

You’d be hard-pressed to find anyone who thinks applying for a mortgage (or refinancing) is fun. But once you’ve gone through the hassle, the savings can be fairly spectacular.

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I pet-sat a stranger’s dog for three weeks at a resort beach, and it cost me just $130. Read on to find out more about this travel hack. 

A few years ago, I was about to embark on an extended road trip with my family when a friend put me in touch with a retired man who traveled around the country, living rent-free.

I was intrigued about how he did it, and he explained that he and his wife signed up to be pet sitters through an online service. The way the service works is you pay a small annual fee to get access to a list of people who need their pets and houses watched while they’re out of town.

You don’t pay anything to stay in the home or receive any money for taking care of the pet. But what you do get is to live rent-free wherever you pet sit.

I was instantly on board. I quickly paid the small fee, and my wife and I immediately began looking for a furry friend to watch. We set up an online profile, complete with a picture of our family, and described our experience with owning pets in the past.

I hoped to find a good dog that got along with our kids in a decent location. What I got was the equivalent of a $10,000 vacation for $130.

Pet sitting in paradise

When we applied to watch Lilly the labrador retriever (name changed), we didn’t know the exact location of her home or that it was in a resort beach community. We knew it was located near the South Carolina coast and that the home’s backyard overlooked a beautiful marsh.

When we finally got the address to where we’d be staying, I was dumbfounded. The townhome was located in the resort beach community and had private beaches, walking trails, shops, restaurants, parks, pools, and an acclaimed golf course that’s part of the PGA Tour.

It also had alligators. A lot of alligators that we had to keep Lilly and our kids away from. But aside from the prehistoric monsters and the typical heat we’ve grown somewhat accustomed to in the south, the location was a paradise.

We took Lilly for multiple walks daily, played fetch with her at the beach, and enjoyed the beautiful sunsets over the marsh from the back porch for three weeks. We even got the chance to go on an amazing pirate boat adventure with our kids — complete with water cannons and pirate treasure — that set sail right from the resort’s docks.

Not only did we score a cheap place to stay at a fantastic location, but we also had the great experience of meeting an amazingly friendly retired couple (they even brought back t-shirts from their vacation for our kids!) and a sweet dog who adored our kids.

Pet sitting as a travel hack

The $130 upfront cost to sign up for access to potential pet-sitting jobs was incredibly inexpensive compared to the free place we stayed in. I recently looked at equivalent Airbnb homes listed in the same resort community, for around the same time of year and three-week length. Several comparable stays I found ranged between $8,000 to more than $10,000.

If you’re considering using pet sitting to travel on a budget, it’s important to note that a good amount of responsibility is involved. Just like owning your own pet, you have to make sure the pet you’re watching is constantly taken care of. Many of the pet sitting jobs that I saw had specific requirements for taking care of the animals.

Additionally, you have to be open to meeting new people and embracing some of the initial awkwardness of the process. We had never met with the couple before we showed up at their home, sat down for dinner with them, and stayed in their guest room the night before they left town. While we had a great experience with them, I imagine that not everyone may have an equally enjoyable time with strangers.

Also, there is a degree of flexibility involved in pet sitting. When we arrived at Lilly’s, we found out that the couple’s vacation trip was shortened to three weeks from the previous five-week timeframe. That was fine with us since our next destination was to visit my wife’s family. But had we booked another pet-sitting gig somewhere else or had other firm housing plans, we would have had to figure out where to stay next with a pretty quick turnaround.

I haven’t pet-sat since that trip, and now that I’m thinking about it, I wonder if someone needs a sweet Labrador taken care of this winter. Perhaps near Disney World? I have references!

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Costco is great. But read on for signs that Sam’s Club might be a better fit for you. 

Many people love shopping at Costco because it offers them an opportunity to save money on groceries and everyday purchases like cleaning supplies and paper products. But even if you’ve had a good experience with Costco in the past, you may want to consider joining Sam’s Club over Costco if these signs apply to you.

1. You have a Sam’s Club store that’s closer to where you live

Even if you don’t shop at a warehouse club store all that frequently, it’s important to find one that’s conveniently located to where you live. And if Sam’s Club fits that bill, then it may be the better warehouse club to join. Not only might that allow you to get over there more easily, but it might help you save money on gas getting back and forth.

2. Your local Sam’s Club has better prices

Both Costco and Sam’s Club are known for their low prices. But if you’ve been to both and have come to the realization that Sam’s Club prices tend to be more competitive in your area, then that may be a better store to shop at.

As an example, Costco sells a 12-count of Bounty paper towels for $25.99. That’s a price of $4.07 per 100 square feet of paper towel. Sam’s Club sells a 12-count of Bounty paper towels for $23.48, or $4.00 per 100 square feet of product.

Now clearly, the difference in price here isn’t huge. But it’s just one example. And it’s worth noting that these prices are the ones listed for Costco and Sam’s Club online as of this writing. Prices can be lower (or different) in stores, and they can also vary from store to store.

So all told, you may need to do some research and keep tabs on price changes. But if you find that Sam’s Club consistently offers better prices in your area, then switching stores makes sense.

3. You want to save money on a membership

A basic Costco membership costs $60 a year, while an Executive membership costs $120. The Executive membership allows you to score 2% back on all Costco purchases, including those made online.

On the other hand, a basic Sam’s Club membership only costs $50 a year, while an upgraded Plus membership costs $110. With a Plus membership, you’ll get 2% back on your Sam’s Club purchases similar to Costco’s Executive membership, only for a bit less money.

The difference in cost between a Costco membership and Sam’s Club membership isn’t all that significant. But if you find that both stores are equally convenient to get to and offer a comparable range of products and prices, then you might as well choose the one that costs less to join.

Costco is a great store and many fans love it. But if these signs apply to you, then it may be time to say goodbye to Costco and become a member of Sam’s Club instead. Doing so could be your more convenient and cost-effective choice.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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Whether you’re borrowing money to make a home improvement or to pay for a wedding, the type of loan you take out matters. Keep reading to learn why. 

Unless you’ve been living off the grid in the woods, you’ve probably heard news regarding the recent increase in home values. And if you own a home, that likely means you have more equity than ever before in your house. If you’re considering accessing some of the equity to cover a large expense, you’ll want to read this first. A home equity loan may be your best option. However, it’s also possible that a personal loan is your best bet.

Home equity loan

The equity in your home is the amount the property is worth minus any money you still owe. For example, if your home is worth $300,000 and you still owe $150,000 on the mortgage, you have $150,000 in equity. With a home equity loan, a bank typically allows you to borrow up to 80% of your equity. While a home equity loan can be used to pay for anything from a kitchen remodel to a European vacation, the loan comes with pros and cons.

Pros

Generous repayment terms: Depending on the amount borrowed, you could have five to 30 years to repay the loan. While most give the borrower from five to 20 years, some are extended further.Lower interest rate: Because you’re using real estate as collateral, you’ll almost always score a lower interest rate with a home equity loan than an unsecured personal loan.Fix payments: The payments on a home equity loan are fixed and will never change.May be tax deductible: If you use the home equity loan to improve your property, interest payments may be tax deductible.

Cons

Your home is on the line: A lender offers you a lower interest rate on a home equity loan because it knows that if you fail to make payments, your home serves as collateral. That means the lender can repossess the property, sell it, and recoup its losses.You’ll have two mortgage payments: If you still have a primary mortgage, you must continue to make payments on that loan. Once you have a home equity loan, too, you’ll have two monthly payments due on the house.You can expect to pay closing costs: Like almost any loan associated with real estate, you’ll have to pay closing costs of 2% to 6% of the loan amount. If you borrow $100,000, your closing costs will be between $2,000 and $6,000.You’ll need strong credit: According to Experian, you’ll likely need a FICO® Score of at least 680 to qualify for a home equity loan. Some lenders prefer a credit score of 720 or more.

Personal loan

A personal loan is money you borrow from a lender that can be used in any way you see fit. For example, you can use a personal loan to put a new pool in the backyard, to pay for a 50th wedding anniversary celebration, or to consolidate existing debt. Most personal loans require no collateral, meaning you won’t have to put anything of value at risk.

Personal loans are available through online lenders, local banks, and credit unions. It’s paid in one lump sum, and you’ll make monthly payments until the loan is repaid in full.

However, like home equity loans, there are both pros and cons associated with personal loans.

Pros

Fast funding: Once approved for a personal loan, the lender may deposit the money in your bank account as soon as the next business day. This is especially helpful if you’re borrowing money to cover an emergency situation.No collateral: Most personal loans do not require collateral, but if you work with a lender that will allow you to put something of value up as collateral, you’ll probably score a lower interest rate. Again, it’s because the lender knows that it has something it can repossess and sell if you stop making payments.Lower interest rate than most credit cards: While it’s not always the case, personal loans typically offer a lower APR than credit cards. This is particularly true if you have a strong credit score.Low fees for those with high credit scores: Those with the highest credit scores can usually land a personal loan with no origination fee and few (if any) other fees.Ability to pay off quickly: Many personal loans have no prepayment penalty. This means you’re free to pay the loan off as soon as possible without shelling out extra money.

Cons

May find lower interest rates elsewhere: With a good to excellent credit score, you may find a better interest rate by borrowing against your home or taking out a credit card with a 0% promotional rate.Fees can be costly: If your credit score is lower than you’d like, you may find yourself with a personal loan that charges all kinds of expenses, from origination to late fees.Adds to your debt-to-income level: The lower your debt-to-income (DTI) ratio, the more attractive you are to borrowers. DTI measures how much you owe against how much you bring in each month. Taking out a personal loan can raise your DTI.

Determining which loan is right for you

When you’re looking to borrow money, the first step is determining which type of loan will benefit you the most. For example, if you want to add a new addition to your home and need up to 30 years to repay the loan, a home equity loan is your best option. That’s especially true if you’re eligible to take the interest deduction on your tax return.

On the other hand, if you only need enough money to replace a 25-year-old furnace or make car repairs, a personal loan may be the best bet due to the speed of funding. And if your credit score is not high enough to qualify for a home equity loan, a personal loan may be the only game in town.

Explore both options by speaking with your bank or credit union. Once you’ve nailed down which type of loan fits best, borrow only what you’ll need to cover the project. You’ll thank yourself for not taking out more than necessary when the loan is repaid in full.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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I’m spending less than what I feel I can afford to spend on a house. But read on to see why I’d prefer to keep my housing costs low. 

On a national level, the average U.S. mortgage payment is $1,768 a month, while the median payment is $1,532, according to the Council for Community and Economic Research. Now, I’m not going to share what my monthly mortgage payment is. But what I will say is that I recently crunched some numbers and came to the conclusion that if I wanted to, I could comfortably spend an extra $1,000 a month on housing without running into a financial crunch.

But I’m not making plans to move anytime soon, and it’s not just because I’m too lazy to deal with packing up a house full of stuff. (Well, okay, maybe that’s part of the reason.) I’d rather keep my housing payments low because doing so allows me to do other things that are important to me — like sleep at night.

I’d rather not commit to too much house

An extra $1,000 a month would likely buy me a house with more square footage, more much-needed storage space, and perhaps a garage that’s large enough to fit my car and all of my junk. But at the end of the day, it’s not worth it to me to spend an extra $1,000 a month on housing because I have other uses for that money.

My family and I like to travel. We don’t tend to take fancy vacations at all, but we do like to take a few road trips each year. Even though we usually drive to our destinations, it costs money to fill up our car with gas and secure lodging and eat and do things. And I’d rather have an extra $1,000 a month to allocate to travel and other things we enjoy doing together.

Also, it’s my goal to build up a nice retirement nest egg and save up for my kids’ college education. So by not spending an extra $1,000 a month on housing, it’s easier for me to fund my retirement plan and my kids’ college accounts.

But spending less on housing than I can afford doesn’t just give me more financial leeway — it gives me more peace of mind. I can honestly say that if I were to buy a more expensive home, I’d probably be more stressed over money in general. And that’s just not worth it.

It’s important to know your limits

As a general rule, it’s a good idea to keep your housing costs to 30% of your take-home pay or less. So if your paychecks give you $6,000 a month, you’d want to not spend more than $1,800 to put a roof over your head. And that $1,800 should include not just your mortgage, but also, your homeowners insurance and property taxes.

Based on that 30% rule, I know I have the option to spend up to another $1,000 a month on mortgage payments. But you know what? I just don’t want to. Instead, I’ve decided to be content with the modest but comfortable home I own and enjoy the benefit of having extra money at my disposal.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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A CD is generally not the best place for an emergency fund. Read on to see why, and learn where you should keep it. 

CD rates are looking pretty attractive these days on the heels of a series of interest rate hikes from the Federal Reserve. Some CDs are paying 5% interest or more for terms as short as six months.

You may be tempted to open a CD so you’re able to not only snag a higher interest rate on your money than what you’d get in a savings account, but also, keep that rate locked in for a period of time. But if you decide to house your emergency fund in a CD, you could end up making a big mistake.

Why CDs are the wrong place for an emergency fund

When you open a CD, you commit to keeping your money there for a certain period of time. It could be six months, 12 months, two years, or longer.

The upside of opening a CD is that you might get a higher rate on your cash than what a savings account will give you. And also, you’re guaranteed that rate until your CD matures.

By contrast, you could start out getting 4% interest in your savings account, and if rates fall a few months down the line, your rate could drop to 3% — and then continue dropping. If you sign a 12-month CD at 5%, that 5% is locked in.

But in exchange for that guarantee, you give yourself less flexibility with your money. That’s because you can’t take a withdrawal from a CD — that option generally doesn’t exist. Rather, if you need to access money in a pinch and your CD is your only source of cash, you’ll generally have to cash out your CD in its entirety. And that could cost you.

It’s common for banks to impose a penalty when you cash out a CD before it comes due. Now, those penalties will vary by bank. At Capital One, for example, cashing out a CD before it comes due will cost you three months of interest for a CD with a term of 12 months or less. For a CD term that’s longer than 12 months, the penalty is six months of interest.

But with a savings account, you can take a withdrawal at any time without penalty. And that makes a regular savings account a much better home for your emergency fund.

CDs are a great place for extra money

You may decide that your emergency fund should have enough money to cover six months of essential living expenses. But if you’ve reached that point and are able to save, say, another $1,000, then you may want to open a CD to snag more interest on it.

In fact, CDs are a great home for your extra cash. They’re just not the best place to keep emergency savings, namely because you might end up having to access that money to cope with an unplanned bill. So while the idea of accepting a lower interest rate on your cash and not being guaranteed that rate may not sit so well with you, think of this way — would you rather do that, or face a costly penalty for accessing money you need at a moment’s notice?

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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