Our son is about to graduate from law school. He took out a loan to cover the cost, but we've been paying on it for two years to help him out. Right now, the balance on the loan is about $76,000. We could continue paying it off, but my husband is hesitant. How do you feel about this situation?
It's not a bad thing if you guys decide to continue helping him out by paying off the rest of the loan. But I don't want you to feel as if you're obligated in any way. No deal has been broken here, and you haven't reneged on a previous agreement. But there's absolutely nothing wrong with a young lawyer earning a living and paying off his own debt. He can roll up his sleeves and clean up the mess he participated in making.
If you do decide to pay it off, that's an incredibly generous gift. In my mind, it should be met with much gratitude and appreciation. It should also be accompanied by a signed letter of agreement from him stating that he will never, except in the case of a 15-year, fixed rate mortgage, borrow money again.
In other words, I'd want to see some kind of permanent commitment and recognition of the fact that you guys have changed your family tree. I'd want this kid to be affected in a deep and profound way by this gift; so much that his kids would also be affected in a positive way by your behavior and by his in the years to come!
No refinancing downside, if ...
Is there a downside to refinancing your home often?
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.
Dave Ramsey is America's most trusted voice on money and business. He's authored four New York Times best-selling books: "Financial Peace," "More Than Enough," "The Total Money Makeover" and "EntreLeadership." The "Dave Ramsey Show" is heard by more than 5 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the Web at daveramsey.com.