Refinancing is a hassle. You have to produce tax returns, earnings records and other miscellaneous documents your lender dreams up. Your property has to be appraised, your credit is run through the ringer, and you have to make sure your lender isn’t stuffing your loan with a boatload of miscellaneous fees and charges. It is time consuming and stressful.
There are also up-front costs. Your lender isn’t going to begin the process without a little cash changing hands, and if your house does not appraise or you are not happy with the terms offered to you, you are out that money.
Why are you putting yourself through this?
Special circumstances — If you are trying to save your home by modifying your loan using one of the bank bail-out programs to lower your payments, stick with it. Banks are not yet doing enough to help homeowners. Kick, scream and holler to make them live up to their obligations. Once you are settled in your new loan, call me.
If you are refinancing to shave your interest rate and to save a few dollars a month on your payments, there are a couple of big things you need to consider: the true cost of refinancing and the true savings of your new loan.
1) The true cost of refinancing –
Typically the cost of refinancing is about 1-1/2% of the loan amount. If you are borrowing $200,000, the amount will likely be about $3,000. Compared to the size of the loan, it doesn’t sound like much, does it? But if you are like just about every other homeowner, you will be tacking that amount of money onto your loan. In effect, you will be borrowing $203,000. Over the life of your loan, that $3,000 at 6% will turn into $6,475.15. That still doesn’t sound very impressive, does it? But what if that $3,000 had been doing something else all that time? If instead you had invested the $3,000 in paying down your mortgage, you would have canceled the first fourteen payments of a $200,000 loan at 6%. That would mean fourteen payments that never have to be made, totaling $16,787.40. So… add the $6,475.15 in actual costs and the $16,787.40 lost to payments, and the total of your closing costs is really $23,262.55.
2) The true cost of your new loan –
When you refinance, your new loan resets to Month #1. Once again you are 360 payments away from having your home paid off. The rule of thumb over the past couple of decades has been to refinance when interest rates drop about 1%. That dogma is wrong and is designed to keep you in debt forever. It will help your bank build the largest building in town, but it absolutely will not help you.
Typically people refinance every 5 to 7 years. If you have had a $200,000 loan at 6% for 5 years, you will have paid down $13,891.29 in principal. That doesn’t sound bad, does it? But wait. You also will have paid $58,054.78 in interest. You will have paid 4 times as much interest as you paid in principal. Every month you pay on your mortgage, you pay a little more principal and a little less interest. It will take 18 years and 7 months (223 payments) for the principal part of the payment to finally exceed 50% of the total payment. That means it will take 223 payments before you are finally paying more principal every month than you are interest. If you refinance after 5 years, your new loan will start all over again, and your initial payments will again be weighted toward paying interest.
Let’s assume you refinance your $200,000 loan that was at 6% for 5%. The payments will drop from $1,199.10 to $1,073.64, a savings every month of $125.46. Sounds pretty good, doesn’t it? Over 360 months, assuming both loans were held until payoff, the total interest paid on the second loan would be $45,165.60 less than that for the original $200,000 loan at 6%. Pretty good.
But wait. We’re not done. Remember the true cost of the closing costs was actually $23,262.55. And don’t forget the lost interest from the first loan was $58,054.78. Subtract these from the $45,165.60 in potential interest savings and, provided you do not refinance again, the savings over 30 years is no savings at all. It is a loss, and it amounts to $36,151.73. If you refinance again, it will only become worse.
Hmmmm.
There is a better way. United First Financial came up with it, and the Money Merge Account program is the answer. As with the closing costs above, the cost of the program can also be paid for by your bank, but instead of generating a loss of maybe $36,151, the small investment used to refinance and generate that loss could instead be used to pay off the $200,000 mortgage in about 15 years and save maybe $90,000 in interest. Furthermore, 180 payments do not have to be made, which means $215,838 does not have to go to payments and can be spent on other things.
Let’s see –
- $36,151 lost v. $90,000 of savings?
- 360 months v. 180 months?
- $0 to invest v. $215,838 to invest?
Cheez. It looks like a slam dunk to me. A no brainer. Of course, results will vary. But doesn’t it make sense to look at the possibilities of what United First Financial and the Money Merge Account program can do for you? Contact me for your FREE, no obligation analysis.
