Saturday, 03 August 2013 13:37

Refinancing Your Home and IRA

Written by  Dave Ramsey
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Q.  Is there a downside to refinancing your home often?

 

A.  There’s really no downside to this, as long as each time you do a refinance you lower your interest rate enough to allow you to recoup closing costs before you move. In other words, you have to first make sure the numbers work.

 

First, calculate the amount of money you’ll save as a result of a refinance. The way to do this is by multiplying the interest difference by your loan balance. If you have a $200,000 mortgage on a 5 percent loan, and you refinance to a 3 percent loan, that will save you 2 percent per year, or $4,000. Next, look at the refinance costs. What are the closing costs in order to refinance? If it’s $10,000, and you divide that by $4,000, that says it would take two and a half years to get your money back. If the costs are $8,000, it would take you two years to get your money back if you’re saving $4,000 a year. That’s pretty substantial!

 

What I just laid out is called a break-even analysis. Basically, it answers the question of how long it will take you to get back the money you spent on closing costs with the interest you save. That will give you the answer as to whether or not you should refinance again.

 

So, there’s not really a “you’ve done this too often” rule. If you refinance three times in a year it would only be smart if interest rates have dropped significantly throughout that time. Doing a refinance to save an eighth of a percent won’t work out well for you.

 

 

Q.  I’m following your plan, and I’ve just completed Baby Step 3. I’ve got my emergency fund of three to six months of expenses in place, and I’ve paid off all my debts, except for the house, so I’m ready to tackle investing. I currently have $100,000 in a traditional IRA. Should I convert this to a Roth IRA?

 

 

A.  You’ll have to pay taxes on the amount you withdraw, and that will amount to roughly a fourth of what you roll from a traditional IRA to a Roth IRA. If you move $100,000, it will cost you about $25,000 in taxes.

 

If you have that kind of money saved above your emergency fund, and separate from retirement savings, then yes, I’d convert to a Roth IRA. Don’t cash out your retirement or dip into your emergency fund. And please, please don’t run out and borrow money to make it happen!

 

The traditional IRA is growing on a tax-deferred basis, while the Roth IRA would grow tax-free. So, if you can pay the taxes out of pocket, I say go for it!

 

 

 

 

 

 

 

Last modified on Saturday, 03 August 2013 14:12
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