For the intelligent readers of this blog, this entry is just a rant. I heard a segment on the radio tonight about “Should you Refinance”, and I was pretty appalled at the advice given. The expert on the radio said, “If you are already well into your loan, one drawback is that you’ll reset the clock for 30 years with your new loan…”
Ok, well its true that you generally get 30 more years to repay. But since when is that a drawback? His statement reflects the underlying principle of how Americans view loans – and it is very troubling.
Refinancing shouldn’t be about getting a lower monthly payment unless you simply can’t afford your current loan (should be rare). Refinancing should be about saving money because you are paying less in interest each year and paying more against your principal instead. It’s pretty simple.
Are we so stupid that we think we have to put the dollar amount that is on the payment slip each month? Yeah, I guess we are – welcome to the land of the ‘interest only’ ’30 year loan’.
Mike, Mike, Mike,
Although the Rant is well founded, I’m not sure if the “expert” is wrong.
If a person buys a house, pays 10 years on it and then refinances the house for 30 years, then yes, they have reset the clock. That is a bad thing unless of course they have a situation that warrants a lower monthly payment.
And here lies the dirty truth about the stupidity of Americans and the mortgage refinance business. Instead of refinancing the new loan for 15 to 20 years with a lower interest rate, a home owner will reset for 30 years and end up paying more in interest versus the original loan since most interest is paid in the first 15 years of a loan anyway.
So, yes, as an American I agree with you that there are a lot of our fellow Americans who have no clue on how to critically think through a situation and make a good decision.
And what really pisses me off is to hear politicians gleaming that “Home Ownership” is at an all time high. To be honest with you, I would bet a bunch of dough that most Americans don’t outright own their home… the banks do!
I guess I’m stupid, because I’m not following your argument.
“Ok, well it[‘]s true that you generally get 30 more years to repay. But since when is that a drawback?”
It depends what you consider a drawback. Spending lots more on interest is a drawback. Reducing the rate at which you’re building equity and thus risking having your loan go upsidedown in a declining market might also be considered a drawback.
Suppose you’re 15 years into a 30-year loan of $250k at 8%. Each month you’re paying about $1850. At this point, you still owe about $192k and about $550 of your monthly payment is building equity.
If you refinance now, you restart the clock. If you get a much lower interest rate, say 5%, then your payments drop to about $1030. But since you’re back at the beginning of the loan, each payment is predominantly interest. Only about $230 of that first payment will go to the balance.
On the other hand, if you refi for a lower rate at 30 years, but you keep paying what you used to pay, you can save yourself lots of money in the long run. But that’s not really restarting the 30-year clock. Another option would be to refi the balance at 15 years and really save on financing costs.
Herschel and Adrian – you are both getting it; but the expert is absolutely wrong.
For the majority of loans, the bank does not dictate the rate at which you repay the loan. They only set a maximum bar – usually at 30 years. The rate which you decide to repay your debt is up to you.
Say you are 10 years into a 30 year loan. You refinance at a lower rate. You keep paying the same monthly payment you’ve always paid. Your loan is now paid off *faster* than it was before. The expert said that a new loan takes longer to pay off. He’s just plain wrong. A new loan at a lower rate only takes longer if you chose to pay it off more slowly!
What are you guys talking about? Paying off debt is foolish! The experts say so!
http://www.latimes.com/business/la-fi-homedebt28aug28,0,6044251.story?coll=la-home-headlines
“If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years,†said David Lereah, chief economist of the National Association of Realtors and author of “Are You Missing the Real Estate Boom?†“It’s as if you had 500,000 dollar bills stuffed in your mattress.â€
He called it “very unsophisticated.â€
Anthony Hsieh, chief executive of LendingTree Loans, an Internet-based mortgage company, used a more disparaging term. “If you own your own home free and clear, people will often refer to you as a fool. All that money sitting there, doing nothing.â€
Heh – well, I know you are kidding, Dennis.
Just keep in mind that those quotes are from folks that make money on you constantly churning through loans. If you did pay off your loan, he wouldn’t have a job!
It’s the American way, I guess.