Love the House…Date the Rate

Have you heard this before??

In a market of high interest rates, this is one phrase that mortgage brokers are repeating everywhere. It sort of give’s me the heebie-jeebies. And I hadn’t really understood why until recently.

Mainly, by itself, this is just bad financial advice! It’s just like so many things…if you listen to it in a vaccuum or by itself, it isn’t a good move. So let me try to explain, from a non-financial person’s point of view.

The concept is that you can refinance your mortgage at any time. But there is so much more to consider when thinking of a refinance that, without an entire conversation, that advice becomes just a sales gimmick. And here’s why…

The length of the loan. When you took out your mortgage, it is for a 30 year note. When you choose to refinance, it is for a 30 year note. The time does not get shorter! Lets say you bought in 2010 and refinanced in 2021 when rates were 3%. You jut added 11 years on to the amount of time that it will take you to pay off your home. If you were in your 40’s when you did the refi, you will now be in your 70’s when the home is paid off. For most of us that is past the time that we would like to retire, when we would like to work less and pay less bills. Even if you have ample retirement plans (and 75% of us don’t), for possibly 10 years of your retirement you are making a mortgage payment when it could have been paid off. People do this way too often. Instant gratification will not serve your needs in the long game. And LIFE is a long game. For many people this doesn’t seem like an issue because they will buy and sell every 10 or 11 years. But it really is! Unless you are paying more towards the principle of the loan, when you go to resell, the pay off amount has just been reconfigured for a much longer amount of time.

Lower Payments Are Deceiving. When you took out the original loan at $350K, the total you would have paid the bank in 30 years is $815K with principle and interest. The banks have to pay their people. They are not a non-profit. Even when you refinance, you are paying a huge amount over to the bank. In the example I used before, you are still paying the bank $474K (for a new 30 year term). You would have paid the bank $753K even with the refi. Do you think the same house will be worth that much more in 40 years? That depends! If the value of homes appreciates in that neighborhood at an average of 2% per year for 40 years, the homes value would be $772K. But if there’s a cooling period, or a financial crisis, or a fire, or a flood… It is a lot of variables to consider when thinking about getting your money’s worth on a refinance of your home. (And don’t even get me started on refinancing your car…do the same math and you will see the answer is NO!) This might sound confusing…I said I was not financial, not not smart. It helps me to write all the numbers down. Yes, like a high school algebra problem.

But there is a way to BEAT THE SYSTEM

Take a 15 year loan! If you are going to refinance and it has been at least 10 years since you first financed, ask about a 15 year mortgage! They even make a 20 and 25 now! Don’t just take the assumptive 30 year. Yes, the payments will be higher, but you will be paying significantly LESS in interest and more towards principle. It gives you more equity and the bank less money!

Buy Points on your Rate…maybe. Sometimes the lender will apply points without you asking to get your payment to where you can manage it with your debt-to-income ratio. It’s like paying a penalty to get your interest rate down. It doesn’t go toward anything else but a fee to the bank. It may be helpful, but it is not the best solution.

Pay More on Principle. This is always the best option. The more you can put down at the begining of a mortgage the less you pay mothly and in interest. Even in a refinance, that is a great time to pay more towards the principle.

The MOST important thing is that you love your home. I can tell you from experience that if you are in a place where the energy is off, the space isn’t working for your family, the neighborhood has you stiffled, or the commute is causing you too much anxiety (just to name a few reasons people move) than it is time to find a new home. You DO NOT have to wait for the perfect market conditions. There are tips and tricks out there