Consider your 'break-even point' before refinancing a mortgage

Q: I'm two years into a five-year adjustable rate mortgage for our home. The rate is locked in at 5.6 percent for three more years, but we have a portion of the home financed with a variable credit line through the same bank. I'm wondering if and when we should refinance. We've done significant work on the home – completely remodeled the kitchen, two bathrooms, added a mud room, and rewired the house. We also financed 100 percent of the cost of the home: 80 percent in the five-year ARM and 20 percent in a variable interest rate credit line. While all of the remodeling must have increased the value of the home, the monthly payment on the credit line has increased as well. We're likely to stay in this home for at least two more years. It's possible we might sell and move at that point, or there's a thin possibility that we'll live here happily ever after.
T.S., Brattleboro, Vt.

A: The first thought that comes to Lee Baker, president of the Financial Planning Association of Georgia, is that you probably won't get a lot of benefit from refinancing now if you plan to move in the near future. A lot of factors go into determining how long it would take to break even, such as balance owed on the loan, current versus new interest rates, and closing costs. Under a typical scenario, though, he thinks you're probably looking at three-plus years to break even.

As for the remodeling, from everything that Mr. Baker has ever heard, what you put into the remodeling will not be even close to the added value of the house. And after 17 consecutive hikes in the interest rates in the last few years, it looks to Baker as if the Federal Reserve is content to sit tight for now, so that would seem to point to rate stability for at least the near term. If that turns out to be the case, you may not see continued increases in that variable-rate credit line.

Q: My son would like to know how he can invest in a mutual fund and which one to choose. He is a freshman in college and has about $1,000 to invest.
D.L., via e-mail

A: With tens of thousands of funds vying for our attention, the task may seem daunting. However, the $1,000 helps narrow the search because many funds will require a larger initial buy-in.

From there, Brian Jones, author of "Getting Started: The Financial Guide for a Younger Generation," suggests Morningstar.com. This is the well-regarded Chicago-based mutual fund analytics firm, and Mr. Jones thinks it's a great place to start researching individual funds and reading articles such topics as sectors, fund performance and style, fees, and more. Much of what Morningstar offers is free, and it can help walk you through the process of deciding whether you want a growth or a value fund, a small-cap (capitalization) or large-cap fund, and so forth.

As an option, Mr. Jones highly recommends ETFs – exchange-traded funds. These are lower-cost, tax-efficient alternatives to mutual funds that invest in different sectors of the economy. Check out www.ishares.com or www.powershares.com for more information on them.

A drawback: A fee is charged every time ETFs are purchased. If you go this route, Mr. Jones recommends using a discount brokerage.

If you stick with a mutual fund, you can avoid a brokerage fee and buy directly from the fund operator. They all have toll-free telephone numbers to call for applications and directions on how to get the money to them.

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