Mortgage Refinance: Is a Lower Payment Always the Ultimate Goal?
Author: Rob K. Blake
Published: January 22, 2008
I have a bit of mortgage refinance advice that will sound so obviously beneficial, and yet it is rarely followed. Before that, let me ask you a few questions about your last mortgage refinance.
“Did you only look at lowering your payment as the primary determining factor as to whether the refinance was “beneficial” to you?
Okay, now for my “obvious” but seldom used advice….
You should only refinance if doing so benefits you financially over the long run.
The operative words are…”over the long run”.
A mortgage refinance analysis is conducted because you’ve decided to stay put - not move- not relocate - not sell - for the long run…and now it’s time to correct any transient or short run financial decisions made when you had NOT decided to stay put!
Let’s face facts: All home mortgage refinance decisions are long term decisions.
Who can get any financial benefit from a mortgage refinance if they are moving, selling, or relocating, in a few years? Even if rates drop over those few years the slim payment savings over a short run won’t offset the time, the money (and there is always money spent), and the potential for being hoodwinked into a bad loan…and it certainly won’t impact your total interest paid amount hardly at all!
Therefore, if you have a short run hold period for your home…simply put a mortgage refinance off the table!
But you’d be surprised how many folks I’ve discussed refinancing with especially in the last 14 months, who forgot this painfully obvious home mortgage refinance guideline the last time around and are now paying the price of a bad loan forcing them to venture back into the market.
This sounds simple and it is. But people just lose their minds when it comes to a mortgage refinance. Either they believe the no cost refinance ads and or believe their mortgage is some kind of “investment vehicle” causing them to fall into a bad loan trap. Or they sit on a previous bad decision watching it go from bad to worse.
A mortgage refinance costs you money, time, and the bad loan trap, so make it worth the effort and don’t get sucked into a serial refinancer mindset. This do it again and again attitude is perpetrated by banks along with their “no cost” slight-of-hand will lead you down the road to ruin.
If you are considering a mortgage refinance:
1. Make sure you’re staying in the home long term,
2. Pay your costs including possibly some discount points to drive the rate down even further,
3. Then consider also lowering your term from a 30 year term down to 20 year or even a 15 year term.
A rate drop from 6.5% down to 5.5% makes surprising little difference in total mortgage interest paid but a shorter term makes a HUGE difference. Combining both is the most powerful total interest reducing strategy available. Don’t be seduced by a lower payment, look a little further down the road and bag the big game…total interest.
Lowering your rate and term saves you tens of thousands in total interest you pay to the bank….over the long run!
If you really want to make sound financial decisions, stop looking only at payment.
One last piece of obvious but overlooked home mortgage refinance advice:
Do not refinance and take money out to invest in other things…never.
Once again, this mentality of using your house or mortgage as an “investment” is more often than not an attempt to persuade you there is a huge benefit to refinancing. This sales technique cropped up in industry marketing materials when rates started climbing making the standard “lower your payment” benefit moot. I am sure you hear the commercials touting a mortgage refinance cashing out your equity so you can invest it. Horrible advice.
Only refinance if it benefits you by lowering your Total Finance Charges over the long run.
“But Rob, what about a mortgage refinance to pay off high interest credit cards?”
I hear that one often as a possible exception to my rule. It is also an industry marketing mainstay. You constantly hear the ads touting debt consolidation refinances.
It’s all hogwash!
The statistics show over 85% of folks who paid of their credit card debt with a mortgage refinance have returned to their previous credit card indebtedness in less than 24 months!
This is just another method to get you to focus on payment savings over total interest. It’s a red herring. Some might say, “I also pay interest to my credit card bank”…and that’s true. And if a person cut up their credit cards and never charged them up again, it might be a viable strategy. But the reality is 85% of folks don’t operate that way.
So just like you don’t use a mortgage refinance to cash out money to invest, you don’t use a mortgage refinance to cash out money to pay off credit card debt!
Good Luck!
PS: Should you have a legitimate reason for refinancing, you’ll need to know how to find the right provider. Check out The Mortgage Advantage to learn how.
Author: Rob K. Blake
Related Articles
Reader Comments
How To Use Our Comment Section:
1. To comment on the article or post: Simply cursor down to the bottom and add your comment in the box, hit "Save". After moderation, your comment will appear next chronologically.
2. To comment on a comment (not on the post) or what is called a "nested" or "threaded" comment: Remember the name of the commentor, hit the "Reply" link in the comment you'd like to reply to. You're taken to the bottom where you can pick the comment name from the "Reply to" drop down list. Then add your comment to the box, hit save. After moderation, your comment will appear "nested" under the selected comment before chronology is considered. Nesting will go down 4 levels.
Refinancing was exactally what we were concidering just to be free of Country Wide and our adjustible rate mortage even though plans include selling the home. Its such a mind numbing trap we fell into. We didn’t know what else to do. We were going to use the Advantage system to search for a broker, but after this article…???.
Todd,
Why refi if you are selling? If you are selling…what are you waiting for?
Home prices in Feb. alone dropped 4.8%…get the sucker on the market and dump it fast.
Every month you wait, you lose $1,000’s. Then you’ll need The Mortgage Advantage to find the right broker for a purchase money mortgage.
Either way, purchase or refinance, The Mortgage Advantage should be in your future.
RKB
I think that all of us that refinanced recently fell into a well planned trap/conspiracy by the mortgage companies.
Now, my money is being drained and soon I and many others will not be able to continue to make payments. On top of this, the mortgage companies don’t offer any kind of help such as suspending your payments so that you can build your money back. Or they need to give us all a year of release. Release us all from mortgage payments for a year, that way everyone can start fresh and the economy will be boosted at the same time.
Alfred,
I don’t about the conspiracy part…I think the word your looking for is “plan”.
Banking greed knows no bounds and they knew the government would step in to bail them out. So in their mind, why not?
You are right…these lenders are not going to bend over backwards to help folks facing foreclosure…they never have and todays crisis won’t change anything.
Sorry to hear you fell into their ‘trap’.
RKB