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