- Personal Finance
Should I Refinance My Mortgage Loan?
Refinancing Mortgate Loans Serious Answers to Important Questions
When you ask yourself “Should I refinance my mortgage” what you are really asking is “Will I lower my mortgage payment if I refinance?”. Unfortunately there is no one answer that is “correct” for every borrower. Mortgage refinance issues are clouded by tow factors:
- The terms of your existing mortgage contract
- Lender points and fees to structure the refinance agreement
Lenders – especially brokers and those who are independent agents – work for commissions so their job is to load up the fees on the front end and combine them in a way that makes it very difficult for the average person to understand. They have a lot of tricks and many will just plain lie to you.
Let me give you a real world example from my own mortgage application experience.
When I financed my first home loan I was given a “Good Faith Estimate of Settlement Costs” document. This document contained the following:
- Commission Paid at Settlement
- Sales/Brokers Commissions Sales Tax
- Origination Fe
- Discount Fee
- Appraisal Fee
- Credit Report
- Flood Life or Loan Fee
- Commitment Fee
- Tax Service FEE
- Upfront MIP
- Settlement or Closing FEE
- Title Insurance
- Endorsement to Title
- Closing Protection Letter
- Recording Fee – Deed
- Transfer Tax
My first reaction was “What the hell?”…
Who dreams this stuff up? All I want is a loan to purchase a home! I have a good friend who is a mortgage lender so I turned to them for advice. I asked what are all these fees and which ones are “padding”… that is “commission or profit” to the lender and agent?
I also logged onto the NET and began digging line by line into this Good Faith Document to see what was behind each fee. I then called my credit union and asked applied for a loan with them and asked their lending agent questions about all these fees. The Credit Union person I spoke to was salaried so they had little incentive to jack up the fees other than to please their superiors.
What I learned was many of these fees are in fact negotiable, many can be waived outright. But none of the mortgage fees will be waived or reduced if you do not understand what they are and ask your mortgage lender to take action on your behalf. You need to do more than ask really, you need to take a stand. Closing costs can bite you and hard!
Now here is the “catch”… if you have a mediocre credit score you ability to negotiate is severely hampered. You mean nothing to a mortgage lender other than a paycheck. They could care less about your desire to refinance unless there is a big payday in it for them. The only chance you have is to have a high credit score and to educate yourself so they can’t pull any BS over on you.
Lets Return Now to the Should I Refinance Question
If you can save money off your monthly payments then you should refinance as long as it does not raise the entire payoff over time.
Here are some things to ask yourself.
Will I be selling this home in the next 5 years? If you are planning on selling then it may not make sense to refinance because the cost of the upfront fees will probably outweigh the benefits of the initial lower payments on your home.
Will interest rates raise or fall? Nobody has the crystal ball to answer this question. If rates are 6% on a 30 year note right now and you refinance you “win” if rates rise and you “lose” if rates fall. At the time of this writing people with very high credit scores can get in at rates a fraction below 5%. But there is another “Catch” and that is how the lending institution actually calculates their APR (Annual Percentage Rate). Some companies include certain fees and others exclude them in the calculation. So one companies 5.25% offer could actually be cheaper than another companies 5.1% offer! Back to the trickery and manipulation lenders pull on borrowers. Bottom line is I do not expect 30 year mortgage rates to ever realistically drop much below 5%.
Don’t be fooled into thinking there is little difference between a half percentage point! There is a huge difference over the life of your loan. To fully appreciate the concept of compounded interests you must understand 3 concepts.
We all know interest is the money we pay to “buy” the loan and is calculated in the mortgage industry every month. What people do not understand is Annual Percentage Rate. Annual percentage rate is the “effective” rate you will pay over a 1 year period of time. Don’t be tricked! A lender may quote a rate of 5.65%... but they are talking about the monthly rate and not the APR. The “true” APR could be much closer to 6.5%!
It can be very confusing and the lenders know this… and use it to manipulate you for profit. In our world everything is about profit and few people have the ethics to tell you the truth. After all telling the truth works against their paychecks!
Let me give you an example of the power of compounded interest… this is text book questioning from my college days?
Would you rather have $10,000 or a penny… just one penny DOUBLED every day for a month? This is NOT a trick question… but it does show you the power of interest! At first thought that $10,000 looks very tempting doesn’t it? Seriously $10.000 or a penny doubled for a month.
Okay now lets look at the reality of the penny doubled.
Okay we’ve just hit the one week point and we have $10,000 vs. 64 cents that $10,000 is looking pretty tempting isn’t it? But hold on… lets look a bit closer.
- $81.92 … 2 weeks and $81.92… still thinking about that $10,000?
- $10,485.76 ... 3 weeks and look what has happened now!!!
- $5,368,709.12 ... 1 month! … $5 Million!
Amazing isn’t it!!! Interest over time!
The point being that in order to understand if you should refinance your mortgage loan required you to grasp the concept of compounded interest over time.
Now let us put this new knowledge of compounded interest into perspective again.
You borrow $100,000 at 6% interest for 30 Years (360 months)
Your monthly payment will be: $600 per month (Excludes Fees, Taxes, etc.). We are just talking the pure cost of the money here.
So in 30 years you will have paid $600 per month x 360 months = $216,000!!!
So you will have paid $116,000 to “borrow” your $100,000!!!
Seems like robbery doesn’t it? Lets change the interest rate to 7%. Your monthly payment jumps to $665 and the amount paid over 30 years climbs to $239,400. So the extra 1% in this example is actually $23,400!
So lets cut to the chase… should you refinance or not? It depends on your own unique situation. And you have to find an ethical lender, shop around, and compare rates and scenarios. In the above example if you could exclude fees you would save $23,400 by refinancing from 7% to 6%... of course that is assuming you refinanced at the same time as your original loan… not practical. What if you are already 5 years into your loan. Then you have to do the math based on that date as your starting point.
People caught up in short term Adjustable Rate Mortgages (Arms) should almost always refinance because the interest rates climb so rapidly. Just watch out for the fees and lies!
I’d suggest you do a simple search for “Mortgage Load Calculator” and plug the different scenarios unique to your own lending saturation. Then you’ll have a better idea of your chances to save money by refinancing your own home loan before you dive into the salesmanship of the mortgage lenders.
An ethical mortgage broker once told me to always get a 30 year loan. It has the least amount of risk and structured payments you can understand. If you want to pay it off early then do it, but if not then you are not putting yourself at additional risk. I tend to buy into the philosophy. Just make sure there is not an early payment penalty.
And this brings me to one other factor… and that is uncertainty of the economy. No one can ever know what is going to happen. But you can know that our Economy is based purely on paper put into place when the Federal Reserve System was created an the rules were written for a “Fractional Reserve Monetary Supply”. Banks are required to keep only 10% of deposits on reserve. Then they loan against that reserve. The reality is there is only 3% of actual hard currency in the banking system. Think about that 97% of the United States Money is VAPOR… it doesn’t exist; it’s just numbers in computers. Kind of scary? You bet it is… we have a monetary system that is headed to bankruptcy.
It’s only a matter of time. No one… not even the government can borrow forever… at some point the same interest that catches up to you and your mortgage loan, catches up to the Government. So keep that in the back of your mind… you could pay in for years and years only to watch everything collapse again. And there is nothing you can do about it… because the power to change the system lies in the hands of bankers and elected officials the bankers control.