Should I Refinance?

There are some rules of thumb about refinancing when the interest rate drops 2 percent. There are other guidelines too, but maybe you shouldn’t refinance at all – think about this:

We’ve been using home ownership wrong. The idea is that 30 years after you buy your home, it will be paid off and you will own it free and clear. If you get a 15 year mortgage or make bi-weekly payments, you’ll get it paid off much sooner. It used to coincide nicely with retirement. Now instead of getting our homes paid off -we are refinancing every 3 or 5 years to grab a lower interest rate. The problem with that is you go back to the start of the 30 years, again and again and again. How long does it take to pay off a loan with no end?

We get blasted with marketing at every turn. Take that dream vacation. Put your kid through college. Remodel. US Bank has an advertisement with a faucet on the side of a house and that’s exactly how we are using it. This is a big part of the reason some people are upside-down in their homes – they refinanced and spent the money. Now the house has depreciated and they just cooked up a recipe for disaster.

I talk to sellers all the time who say they are going to lose money selling their house because they will barely be able to pay off the mortgage. They aren’t losing money – they already spent their profit when they pulled extra money out of their house when they re-financed.

We’re an instant gratification society. We want to buy something big right now. We look at lowering our house payment a couple hundred dollars a month and that looks good. We figure we’ll be paying less interest and that’s good too, isn’t it? Maybe.

Before you refinance, figure out why. Is it to “pay-off” high interest credit cards? To lower your monthly payment? To take advantage of low interest rates?  Next, figure out what it’s costing you and when you’ll reach the break-even point. Sometimes that alone will render the idea ineffective.

A word about the credit cards. You are not paying them off – you’re just paying them off over 30 years. If you owed $10,000 at 18% interest and paid it off over 3 years, you’d pay $3014 in interest. The same $10,000 at 4% interest paid over 30 years would have you paying $7186 in interest! Over double.

If you decide to refinance, to counteract the extra years you are adding on, think about getting a shorter term, like a 15 year loan, or start bi-weekly payments or pay one extra payment each year (which is exactly the same). What if you banked the amount you save with the refinance? A couple hundred a month is $2400 a year. Ideally, you’d put that in your real estate investment account and save to buy more real estate for your retirement.

Just remember – there is more involved in refinancing than just the interest rate. Put “Owning my home free and clear.” back on your bucket list. It’s a worthy goal and one that will keep your golden years untarnished. You’ll never get there if you keep refinancing.