Monitor opportunities to refinance

With newspapers and magazines widely publicizing the refi boom of the early to mid-2000s, you might be surprised to learn that millions of Americans still hold mortgages with interest rates above 7.5 percent. Even among the people who recently refinanced, more than 50 percent held mortgages with interest rates greater than 8 percent. This is amazing. People will drive across town to use a $5 coupon, but they consistently miss out on opportunities to save tens of thousands of dollars through refinancing.

Granted, no one likes to apply for a mortgage, so people procrastinate. A friend of mine who refinanced a 9 percent mortgage on an investment property had placed this task on his "to do" list three years ago. During that period of procrastination he could have profitably refinanced two or three times. His savings on interest and additional equity buildup would have totaled $15,000. That's a steep price to pay for tardiness.

Mortgage products and interest rates change continuously. Your future plans may change, too. Maybe, you begin to consider a move. Maybe you decide to stay put. Either choice might warrant a change in your property financing. So, at least every few months, compare your current financing and costs (in light of your current plans) to the then available financing alternatives. Not only manage your asset (the property), manage the liability (your mortgage). Manage both and you accumulate wealth faster.

Run the numbers. Calculate your cost savings and increased equity. Think how you might invest some of that money. Translate that gain into a dollars-per-hour figure. A refi can net you more than $1,000 an hour. Unless you're a CEO or an investment banker, that's not bad pay.

Facts, Not Rules of Thumb

Return to the story of my friend Sue with her 7.75 percent mortgage that originated 10 years earlier (Secret #97). She could have refinanced earlier at 6.5 percent and saved a vault load of cash. Why didn't she? She believed the 2 percent rule, which says, "You can't profitably refinance unless you lower your current rate by at least two points." Dear reader, you may be able to refi profitably even if your rate drops by just .50 percent. To answer the refi question, always calculate. Never rely on rules of thumb or back of the envelope guesstimates. Compound interest can easily play tricks with casual conclusions. Talk periodically with your trusted loan rep. Stay abreast of changing products and rates.

Equity Build-Up, Not Merely Lower Payments

Return to that so-called "no-cost" loan (Secret #97). A friendly loan rep calls with a "Have I got a deal for you" pitch. "How would you like to drop your monthly payments by $200 a month—and it won't cost you a cent in fees or closing costs."

Do you realize that a good part of that $200 a month savings results because the lender wants to put you back into a 30-year term? Assume you owe $200,000 at 7.5 percent with 21 years remaining on your mortgage. Your payments run around $1,578 per month. The loan rep says, "I can get you into a 7.0 percent loan that will drop your payments to $1,331. And it won't cost you any money out-of-pocket."

Who could turn this deal down? Seems like found money of $247 a month. But later on, this free lunch will cost you a large check, or, to be precise, 108 large checks. This refinance dramatically slows your equity buildup.

What you saved in monthly payments, you more than lost in equity buildup. Plus, your new loan runs for 30 years, whereas your then existing

Table 10.2 Equity Buildup Comparison

Current

Current

Equity after

Interest Rate

Remaining Term

Balance

10 Years

New loan

7.0%

30 years

$200,000

$28,325

New loan

7.0%

20 years

$200,000

$66,545

Old loan

7.5%

21 years

$200,000

$58,451

loan would pay off in just 21 years. If you really wanted to use a no-cost loan, you could refinance profitably into a 7.0 percent (or maybe 6.75 percent) 20-year loan. Your equity would build even faster—after 10 years, you would owe $133,459. Table 10.2 shows how the three loans compare after 10 years. (The equity shown includes only mortgage paydown—not appreciation.)

Why do loan reps push the 30-year refi? Because the immediate monthly savings look so great. With the 30-year loan at 7 percent, your payment drops by $247 per month. With a refinance into a 20-year loan, the payment slips just $28 to $1,550. Regrettably, most Americans think in terms of low monthly payments now. As a reader of Mortgage Secrets, you know better. Whether you choose to finance or refinance a property, pay as much respect to equity buildup as you do the amount of the monthly payments.

(Caveat: If you diligently invest that $247 savings each month at 8 percent interest, your equity plus accumulated savings could exceed the equity buildup of the 20-year loan. Investors who try to maximize returns may purposely elect this lower payment alternative so they can attempt these greater gains. Most refi folks, though, squander the $247 and end up with less wealth and higher debts.)

The Equity Killer: No Cash Closings

As you saw with my friend Sue, many of these supposedly no-cost refis actually charge large amounts of fees at closing and add them into the mortgage balance. When this add-on occurs along with a renewed 30-year term, equity buildup is set back for years. Never sign up for such a loan. The money you lose will far exceed your monthly "savings." Get the loan rep to run payoff schedules for your loan alternatives, or click on to any of the mortgage calculator web sites. Compare the equity buildups. Make your loan decision with the facts in front of you. How much will that lower payment cost you in future equity? (Same caveat: If you diligently invest, add in your accumulations. However, remember that mortgage payoff not only offers risk-free gains, for most people it provides psychic rewards.)

SECRET # 100

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