Here’s How Refinancing Can Be a Great Idea!

I am doing a refinance for a family right now and here is their situation. They bought their home 9.5 years ago. They have paid 112 months of payments at $751 a month. So far, $11,202 has gone to principal and $72,910 has gone to the lender, in interest. They still owe 248 payments. The total of those payments is $186,248. This is how much they will pay if they stay in their current mortgage and make no additional payments.

So, I looked at their current amortization schedule and compared it with their proposed schedule, and here’s the new plan: We have converted them to a 15 year mortgage. Their new payment will be $735, which is only slightly less, but instead of making 248 more payments, they will only make 180 more payments. This refinance will save them $54,066. And they will skip their December payment – Merry Christmas Smith family!!

I don’t know about you, but $54,066 is a lot of money to me!
If you are curious to know if refinancing your home is a good idea, please give me a call and we’ll look at your situation!

Thanks for taking the time to read my blog!!
~Leslie


865.789.6229
Lsweet02@comcast.net

Why Refinancing Can Be A Bad Financial Decision

Let’s say you have a $150,000 mortgage on your home and your interested rate on it is 6%. When you bought your house, you put it on a 30 year term – this is by far the most common term, mostly because it gives you a lower payment. I pulled up an amortization schedule, and here’s what I found out:

If you have paid on your home for 5 years, you will have paid $53,959.80 in total payments to the bank in principal ($10,418.72) & interest ($43,541.04). Your principal balance at the end of 5 years is $139.581.24. Let’s say that in those 5 years you have accumulated $6,500 in credit card debt that you want to “convert it to a lower interest rate.”

If you refinance back into a 30 year mortgage at $150,000 - at this point, you have just THROWN AWAY $53,959. I don’t know about you, but that is a LOT of money to me! Even if I can save $150 a month, I still wouldn’t pay $53,959 to save $150 monthly. And like I said yesterday, if I haven’t paid extra on my mortgage for the last 5 years, it is very unlikely that I will start now.

Even if I did accelerate the mortgage by the amount I save every month for the remainder of the loan, I would only save $38,063 in interest at the end on the loan. I still didn’t save as much as it cost me to create the deal in the first place. It still cost me $15,896 more than I saved.

Here’s the other point I want to make… If you paid on that $6,500 credit card debt at 25% interest, at $190 a month – that would take you 5 years to pay it off. It would cost you a total of $11,400 ($6,500 balance and $4,900 in interest). Now, obviously you don’t want to pay $4,900 in interest on that debt, but isn’t that still a lot less than paying $53,959.80 ?!?!

So, yes, in theory, refinancing high interest debt into lower interest debt is a good idea. The problem is… a theory does not equate to real life! The other problem is that the math doesn’t makes sense… Would you rather pay $4,900 or pay $53,959?

In my next blog, I’ll tell you about one of the families that I am helping with a refinance on their home right now. After looking at their amortization schedules we were able to determine that we can lower their interest rate, save them thousands in interest and knock several years off of current mortgage loan. They are an example of a great way to take advantage of the current low rates.

Thanks for taking the time to read my blog!~Leslie

Radio Commercial - How to Get out of Debt

So, I hear this guy on a radio commercial, talking about these other commercials, where they advertise that credit card companies have to settle your debt, due to new laws. He goes on to say that this is bull – that there are no such laws. Ok, I’m interested! He’s right so far… there is no law that requires a credit card company to take less from you than what you owe them.

Then, he goes on to talk about how we all have credit card debt and the way to get rid of it, is to refinance it into your home mortgage... plus rates are at historic lows. This is obviously a guy who is trying to sell a mortgage, because this is a TERRIBLE idea for 99% of us!!! The logic says that if you convert your high interest debt into low interest debt, and then pay down the balance faster, you will save money in the long run. The problem is... logic or theology is NOT the same as reality.

There are several reasons why this is a bad idea, but I’m just going to camp out on one reason today. Here it is… Let’s say you currently have a mortgage and you pay your payments on time, but have accumulated credit card debt. Let’s also assume that you have not made any additional payments toward the principal balance of your mortgage. There is no reason to believe that you will pay down your balance any faster after you refinance. There is also no reason to believe that you will not re-accumulate the credit card debt that you just converted.

You canNOT refinance your way out of debt! Sometimes, repositioning assets can be a part of an overall plan to get out of debt, but one transaction will never change your life. Changing the behavior that caused the accumulation of the credit debt is what changes your life.

A typical refinance puts you back on a 30 year mortgage – tomorrow’s blog will be about how much money you waste refinancing a 30 year back to a 30 year. I’m also going to blog an example of the way the interest is calculated – which will show you how a lower interest rate on a mortgage actually has you paying more money than a higher interest rate on a credit card.

However, rates ARE at historic lows, and it can be a great time to knock a few years and tens of thousands of dollars off your mortgage. If you are interested in seeing if refinancing is a good idea for you, or about getting a REAL debt elimination plan, you can always contact me at:
865.789.6229
Lsweet02@comcast.net