I bought my house on Friday. Again. I have owned it for eleven years this month. And I have refinanced, by my count, five times.
Why? Because I want to pay it off. I want to be that cash buyer who goes to the head of the multiple bids. I want to bypass that mortgage payment every month, and write a nice check to some deserving charity instead.
I know a lot of you are, like me, old pros at refinancing, or don’t own homes at all, or have already graduated to mortgage-less home ownership. All of you can skip down to the part where I tell you to enjoy this beautiful fall weather.
For the rest of you, a few thoughts on refinancing.
First, a definition: Refinancing means obtaining a new mortgage loan to replace the current mortgage on your property. Some people borrow more than their current loan balance, and take the remaining amount in cash. Others, like me, only borrow enough to pay off the current mortgage, usually to take advantage of lower interest rates to lower payments or pay the balance down faster, or both.
A FEW PITFALLS:
CLOSING COSTS: When you refinance, you need a new appraisal, and a new title insurance policy. And your lender needs to be paid again. So refinancing can incur several thousand dollars in closing costs.
But most financial institutions offer no-closing-cost refinancing in exchange for a slightly higher interest rate. In my case, about .25%. If you know you will be in your house for a long time, it make sense to pay closing costs and take the lower rate. To calculate, take the amount you would pay in closing costs, divide it by the amount you are saving every month, and you will see how many months it would take you to “break even.” Since I may or may not stay in this house, I opted for the higher rate.
CASH OUT: Sometimes a homeowner needs cash, and equity is a lifesaver. Other times, they just want cash to blow on something fun. If you’re in the second group, think twice. The higher payments may seem manageable now. But when the market turns, and your home decreases in value, you may owe more than your house is worth. And then the only way out of the house is to hand the keys to the nice people at the bank. Which is no fun.
TERM: One of the deceptive ways that refinancing “saves money” is by extending the term of your loan. Say, for instance, you originally borrowed $300,000 on a 30 year loan. Nine years later, you have paid off $50,000 of that loan, interest rates drop, and you refinance. No cash out, so you borrow $250,000 (to pay off the remaining balance), but you once have a 30 year loan. So your new payments spread out over 30 more years, when your original loan would have paid off in 21 years. That's nine more years you will spend making a mortgage payment.
This is dangerous if your goal is to pay off your mortgage before you move to the Retired Persons’ Home.
If you want to refinance AND pay off your house while you are young enough to enjoy it, do this: Use an online mortgage calculator, and calculate payments for your new loan amount, but for the number of years left on your original loan. In this case, a 250K loan on a 21 year term. Then pay that amount for principal and interest every month. You will pay your house off in the same time you would have paid it off with the original loan, but at a lower interest rate/payment. Or better yet, pay even more, and pay it the balance down more quickly.
Or, if you have decent equity, do what I did and refinance to a 15 year mortgage. The rate is usually lower, and it’s amazing how much interest you will save over the life of the loan.
I know that there are differing opinions about the wisdom of paying off a home. Savvy investors say they can take that money and invest it somewhere else gaining more than the 3.5% or so they are paying in mortgage interest.
But I am not a savvy investor. I am a single woman who wants to own her home. If I didn’t put that extra money to my mortgage, I would invest it in a nice, high yielding leather jacket from Nordstrom.
Would refinancing make sense for you? Call me with any questions. Or, better yet, call Deana. Tell her I sent you.
In the mean time, enjoy this beautiful fall weather. And call or email me with any real estate questions, or to find out your current home value. Or to go out and enjoy some nice apple cider or something.