Wes Moss: Will refinancing save you money?

Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.

Wes Moss hosts 'Money Matters' Sunday mornings on AM750 and 95.5FM News/Talk WSB

Wes Moss hosts 'Money Matters' Sunday mornings on AM750 and 95.5FM News/Talk WSB

Earlier this year, I offered this advice on when it makes sense to pay off a mortgage early:

  • If you can pay off your mortgage using no more than one-third of your non-retirement savings.
  • If you are a conservative investor who prefers CDs and short-term government bonds to the stock market. CDs and short government bonds will likely earn less than the rate you are paying on your mortgage.
  • If you have more than 20 years until retirement and want to invest long-term. Instead of paying an additional $200 per month on your mortgage, you will net a bigger return by adding this amount to an investment account.

But what about refinancing your home? Fidelity Bank, a local mortgage lender, was recently offering 30-year fixed mortgages at less than 4 percent and 15-year fixed in the low 3 percent range. Those are incredibly good rates. But does that mean you should jump on the re-fi bandwagon? Maybe not…

When people consider refinancing they too often focus solely on the rate, without considering time factors.

Example: Let’s say you’re three years into a mortgage and can get a new loan that will cost $3,000 in closing costs and save you $150 a month. OK, that means you’ll break even in two years. That’s a good deal – assuming you will keep the house well beyond the break-even point.

But what if you are already eight years into a 30-year mortgage? Up to this point you’ve primarily been paying interest on the loan. Banks know that, on average, Americans own a home for five to seven years. That’s why your first few years of mortgage payments consist primarily of interest. That’s when the lenders make the bulk of their profit.

The deeper you get into a mortgage, the more principal you pay off, and the less interest you fork over to the lender. So your mortgage company would love you to take a loan, pay on it for four to six years, then refinance at a lower rate, thus re-setting the schedule back to the timeframe when they collect the maximum amount of interest.

That’s why if you’re not careful about refinancing, you could end up paying more interest over the term of your mortgage – even if the new loan carries a lower rate.

One way to avoid this trap — and truly save money — is to shorten the term of your new mortgage. By reducing the term from, say, 30 to 15 years, you’ll make fewer interest payments and likely get a lower interest rate.

To borrow a phrase we’ve all learned by heart, a shorter-term loan is “the biggest no-brainer in the history of the Earth.”

– By Wes Moss, for Atlanta Bargain Hunter

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13 comments Add your comment

byronwhitez

December 5th, 2011
4:48 am

The money that you save by refinancing every month can be sensibly used to repay your unique loan or to upsurge your savings. Do not forget to search online for 123 Refinance they found 3.17% rate for me. They taught me how to refinance smart.

Jim McMahan / www.amstarloans.com

December 5th, 2011
8:06 am

Most of my clients are refinancing and reducing the years on their mortgage. We can keep the same monthly payment and reduce them from 24 years left on their mortgage to 15 years on the new mortgage savings them 9 years in payments which is a HUGE amount of savings. Please call for a free consultation at 404-808-0945 cell or email me at jim@amstarloans.com.

JP

December 5th, 2011
8:28 am

Way to be the shameless huckster, Jim. Classy!

Jim McMahan / www.amstarloans.com

December 5th, 2011
9:01 am

JP,
Have you seen the economy lately?
I feel it is all about informing the public of their options and rates are at historic lows.
Are you trying to call me a persuasive or aggressive salesperson? Or a peddler of fruits or vegetables? I have had one person email for advise all ready. Thanks Kevin!

Kate

December 5th, 2011
9:15 am

“Banks know that, on average, Americans own a home for five to seven years. That’s why your first few years of mortgage payments consist primarily of interest. That’s when the lenders make the bulk of their profit.”

Um, no. That’s not why the first few years of mortgage payments are primarily interest. The correct reason is because that’s how the math works on any amortizing loan over 30 years, or to a lesser extent, shorter terms like 20 years. The banks may be to blame for many things, but not for fundamental mathematical concepts.

BOOM

December 5th, 2011
9:21 am

…and Kate goes on to roast the financial guru.

HARP2.0 IS A JOKE

December 5th, 2011
9:26 am

Good luck refinancing…here’s my sad story…I have been employed at the same company for over 15 years, have a 800 FICO Score, am a relatively high earner, put 20% down on my home in 2006. I was quoted 3.875% fixed for 30 years, but now I’m not eligible because my appraisal came in low. Since I now don’t have a 80% LTV, and my loan wasn’t purchased by Fannie until Oct. 09, I don’t qualify for Obama’s HARP 2.0 program. What a joke, I’m financially responsible, have never been late on my mortgage, yet I don’t qualify but the gov’t will bailout or do loan modifications for the financially irresponsible consumers and big business. What am I missing???

rojer

December 5th, 2011
9:36 am

Youre mad because you dont qualify for a govt program? Or are you mad because your residential real estate investment hasnt panned out? Be happy that you are in an envious financial position and take advantage of it by investing now in whatever asset you deem most likely to appreciate. I dont get it. Dont be pissed because your financial position is not bad enough to qualify for govt bailouts… be a capitalist and make some money while others arent in a position to.

Boo

December 5th, 2011
10:29 am

HARP2.0 IS A JOKE: You are the responsible Middle Class that is getting screwed. rojer does not get it because he/she is not there. People who had carefully planned to be a homeowner, put 20% down and made their monthly payments do not qualify for a break. If you had financed a home with little or no money down and then missed your monthly payments, then you would get a bail-out. Mortgage Welfare.

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HARP2.0 IS A JOKE

December 8th, 2011
7:21 am

rojer, I don’t want a gov’t bailout. I simply want the ability to refinance my mortgage at the 3.875% rate that I was quoted. If my mortgage had been purchased by Fannie in May 2009—not Oct 2009—I would qualify. I’m getting screwed because I was financially responsible, put down 20%, made all my payments, but I don’t qualify for the refi because my home value has dropped and Fannie didn’t buy my loan until Oct. 2009. I repeat, if Fannie had bought it no later than May 2009, I’d qualify regardless of my LTV. THIS IS ABSURD!

HARP2.0 IS A JOKE

December 8th, 2011
7:26 am

Boo, my sentiments exactly. You get it—thanks. Penalizing the financially responsible while providing handouts to the irresponsible ARM taking, NINJA loan taking, payment missing folks is mortgage welfare. I just don’t get it. The message is make bad financial decisions, because the gov’t will provide relief, a bailout, or another program that we can’t afford. I would stimulate the economy by spending the money I’d save on a refi. :)