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Steve Owen

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Missouri
"Beware the hidden costs of refinancing"

My favorite quote:

The most important and least understood of these costs is total interest. In the early years of a mortgage, you’re paying mostly interest. During the first three years, 85% of your payments are interest, so that on a $200,000 loan with a 7% interest rate, your balance is still more than $193,000 after three years, despite the fact that you've made more than $48,000 in payments.

http://www.moneycentral.msn.com//content/B...cing/P42715.asp
 

jtrotta

Senior Member
Joined
Jan 16, 2002
the more interesting thought is, when people continually Re-Fi - they don't consider the loss they create by not continuing their existing mortgage, especially if they've already done the first three years. 8O

8)
 

John Hassler

Senior Member
Joined
Jul 23, 2002
Professional Status
Certified Residential Appraiser
State
California
jtrotta

You are dead on! Most people refi their 30 year loan with only 28 years remaining for a new 30 year loan. If they would just spend 2 minutes with an HP12C and re-calc the new loan with a 28 year life they would see what the actual savings are.
The other item few seem to consider is pre-paid interest (ie points). If you paid $5k last year to refi (1 point + closing costs, typical in my market), and then do it again 12 months later, last year's cost an additional $416 per month over the one-year holding period.
But, hey, it's the snake oil salesmanan's job to tell them the loan costs, I just tell them what the properties worth!

John Hassler
 
B

Bemis Pownall

Guest
You are dead on! Most people refi their 30 year loan with only 28 years remaining for a new 30 year loan. If they would just spend 2 minutes with an HP12C and re-calc the new loan with a 28 year life they would see what the actual savings are.
The other item few seem to consider is pre-paid interest (ie points). If you paid $5k last year to refi (1 point + closing costs, typical in my market), and then do it again 12 months later, last year's cost an additional $416 per month over the one-year holding period.
But, hey, it's the snake oil salesmanan's job to tell them the loan costs, I just tell them what the properties worth!

Dont forget once they have a lower payment, interest tax deductions are reduced too. Not a win win situation.
When it comes to mortgages typical homeowners are very short sighted, egged on by the LO.


Dont let the SECRET out, we dont want to scare business away. We're just the appraiser. Supply and demand is killing me right now.
 

liznindy

Senior Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Indiana
How many people actually live in a house long enough to pay off the mortgage?? It's all about the payment amount (IMHO).....And now with reverse mortgages, no need to worry about having a house paid off by retirement time....BUT do need that equity for a reverse mortgage.

I have no problem with going with a 30 year mortgage after paying on it for a few years. Can always pay extra each month to reduce the term and that "extra" is coming off principal.
 

KD247

Senior Member
Joined
Jan 24, 2002
Professional Status
Certified Residential Appraiser
State
California
Contrary to what some people believe, there's nothing wrong with refinancing every time rates drop, provided that you don't increase the loan term. There's an old wives' tale that, because principal portions are so small in a mortgage's first years, you are losing something of value if you refinance after you've made it through those first tough years.

Actually, you can refinance whenever you like and as often as you like with no loss whatsoever, unless you choose to pay extra to increase the term of the loan.

For example, if you have a $100,000 30-year loan at 10%, your payments are about $877 per month. You could refinance once every year and start a brand new 30 year loan thirty times, but as long as your payments are kept at $877 per month, you'll pay off the loan in exactly 30 years.

In real life, we refinance to achieve a lower interest rate. If you refinance at a lower rate, your payment drops for two reasons: the lower interest payments and the lengthened term of the loan. It always pays to take advantage of the lower interest rate, but it costs money to extend the term of your loan. The extra costs are incurred when you replace a loan with 25 years remaining with a new 30-year loan; but if you replace it with a new 25-year loan there is never a disadvantage to refinancing.

Take the same $100,000 30-year loan at 10% and say you've been paying on it for five years. If interest rates go down to 6%, you could refinance the remaining $96,600 for a new 30-year term and your payments would go from about $880 to about $580. But only $270 of the savings is due to the interest rate reduction. The other $30 in savings is due to the lengthening of the loan term. So, if you want to take advantage of the lower interest rate, but don't want to pay extra for a longer loan term, just increase the new loan payment by $30 and pay $610 per month instead of $580. You still save $270 per month and the loan is paid off at exactly the same time.

So, the general rule is: it always pays to refinance at a lower rate - provided that the term of the new loan is equal or less than the remaining term on the new loan.

Ok, there's a fly in the ointment. The above assumes no loan costs. But, it usually still makes sense to refinance even when there are loan fees. If there are costs involved, it's easy to figure the amount of time required to break even - just divide the costs by the monthly savings. In the above example, if the loan fees are $2,700 your savings don't start until you are ten months into the new loan.

Why do I care? Because there is nothing better than repeatedly appraising the same home every time interest rates drop. Spread the word - it's okay to refinance every six months!
 
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