Money Myth – Refinancing A Mortgage

Refinancing a home mortgage money mythFor some reason I’ve been running into people lately that have fallen for a variety of money myths. I consider a money myth something where the person thinks they are taking a positive action for their finances, but in reality, they are hurting them. A perfect example is a friend this weekend who was telling me he has refinanced his mortgage three times over the last 10 years to “save money.”

He explained how he had reduced his mortgage payment several hundred dollars a month with each refinance and he was obviously proud of the smart financial move he had made. I actually felt quite bad when I explained to him that in reality he would end up paying much more for his house

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11 Responses to Money Myth – Refinancing A Mortgage

  1. Wes says:

    Your blanket statement is mathematically incorrect. If the interest rate is low enough, it certainly does make sense to refinance. Look at it this way: each time you make a payment you are refinancing your mortgage at your current interest rate and your new principal balance. You need to compare the sum of your remaining interest payments and the sum of your new theoretical mortgage.

    Wes

  2. pfadvice says:

    Your blanket statement is mathematically incorrect. If the interest rate is low enough, it certainly does make sense to refinance. Look at it this way: each time you make a payment you are refinancing your mortgage at your current interest rate and your new principal balance. You need to compare the sum of your remaining interest payments and the sum of your new theoretical mortgage.

    Of course there are always exceptions and you always should always run the numbers and why I said “likely pay much more money over the long term for the loan.” — and you are correct, I should have pointed that out more clearly as I made an assumption (which was probably bad on my part) that those who read me would already know that.

  3. thc says:

    You make an excellent point that many folks don’t consider. And these days most lenders will write a mortgage for almost any length you desire.

  4. 2million says:

    I agree its a good point to consider – many people boost that they save money when they refinance but they don’t know what they are talking about. When I have considered refinancing, I have always looked for a no closing cost refinance and set the term to be the same remaining on my current mortgage. Therefore I have no out of pocket costs and the term hasn’t changed – therefore if I have a lower monthly payment I know I have come out ahead.

  5. RS says:

    The closing costs are another thing to consider when refinancing. They can sometimes be quite large…I think mine were almost $5000 when I did it 5 years ago or so. Just something else to consider.

  6. Caitlin says:

    I think the my of “lower monthly payment = saving money” is even broader than mortgages (like someone assuming thata 5 yr auto loan with a lower monthly payment is a better deal than a 3 or 4 year loan, simply due to the lower payments) and that the most important point is that folks need to run the numbers.

    Yes, there are situations where refinancing will save you money…but the point that’s being made here (I think) is to not just assume a lower payment has saved you money.

    I’ve refinanced twice within a three year period, but i felt I had good reason for doing so each time. Of course now I want to go do some math…LOL

  7. John OMM says:

    I think you’ve made some good points. Consumers should take into account more than just the monthly payments when they purchase anything with an installment agreement whether it be a house, car, television or toupee.

  8. Pingback: Journey To Financial Freedom » What I learned from others - Money Myth : Refinancing A mortgage

  9. makingourway says:

    Jeffrey, $2m, Caitlin, et. al.,

    I think there’s also another dimension to refinancing – what you’re going to do with the house.

    It certainly makes sense to incorporate closing costs, interest rate savings, extended mortgage period (and therefore increased interest payments).

    However, if you are not intending to stay in the property for long – example 20 somethings planning on moving from the city to the suburbs to raise children, a lower monthly cash out amount might be helpful – especially if they need to increase available cash for either their move or downpayment. Then again, you might need to weigh the issue of equity in the house vs. accumulated cash.

    Have a wonderful weekend,
    Making Our Way
    http://makingourway.blogspot.com

  10. BoilierHorn says:

    [quote]When I have considered refinancing, I have always looked for a no closing cost refinance and set the term to be the same remaining on my current mortgage.[/quote]

    In almost every refi closing statement I have seen, you ‘skip a month’ of payment in exchange for the arrears interest (due to payoff amount) to be applied to the new balance. I guess you could pay that interest in order to avoid the arrears interest, but i think you have to pay it at payoff/refi time…

    How am I wrong or am I getting ‘screwed’?

  11. steveb says:

    Borrowers who live in their property and have loans that were issued between January 2005 and June 2007, also, they must spend at least 40% of their gross monthly income on all household debt.

    Whether they are up-to-date in their mortgage or if they are in default, they must prove that they will not be able to keep up with their existing mortgage payments, and attest that they are not deliberately trying to default just to obtain the benefits of lower payments that this program offers.

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