How Refinancing Your Home Can Lead to Bankruptcy!
Refinancing seems like a great idea. You have a 6% loan and your banker calls you and says they can get you a 4.5% loan, a couple of thousand dollars and lower your payment by $25 per month. WOW! Free money! I’ll take it! Well that money isn’t as free as it sounds. There is all sorts of bad advice on the internet about when to refinance. The most common advice is to refinance if you can save 1% interest. I am here to tell you- refinancing is usually a bad idea. I and many of my bankruptcy clients have fallen for this bad advice.
Here’s why. The interest you are paying on loans is front loaded. For instance- if you have a $200,000 30 year mortgage at 5% interest your payment will be $1,073.64 per month. In 10 years you will pay $128,836.80 toward this $200,000 obligation. Guess how much your balance will be? Really take a couple of minutes don’t read further- Guess. A: $80,000 B: $100,000 or C: $163,000. If you guessed $163,000- you would be right. Isn’t this ridiculous! The system is rigged against you from the start. You see you pay the bank their profit first. If you look at your amortization, you will see it takes 10 years to start paying the loan down at all!
Ok-so now we owe $163,000. We get letters in the mail. Interests rates are at a historic low! You call your local lender. Sure enough- he can lower your rate by 1% and give you $5,000 with no closing costs (that would never happen). So you think- Great! Free money! You finance $168,000 for 30 more years at 4% interest. Your payment is now $802.06 per month. Man that is great. You are saving $200 per month right! Well after 10 more years and $96,247.20 guess what your payoff is. It is $132,000. If you had just stayed with the old loan at the same point- your payoff would be $100,574. The bigger problem is you still have 20 more years to pay on the 2nd loan. If you had stayed with the first loan- you would be completely finished in just 10 more years. Are you starting to see how this strategy can lead to bankruptcy?
If you had stayed with the first 5% loan, your total costs are $386,513. By refinancing after 10 years (and lowering your interest rate), your total costs increase to an amazing $417,576.80. I don’t know about you but $31,063 is a lot of money to me. This doesn’t take into account the pain of increasing the term of the loan by another 10 years.
What do you think? Will this analysis change your mind about refinancing in the future? Full Disclosure. I have made this mistake a couple of times. I could kick myself for refinancing my old home twice. I promise I will never do it again. Many of my bankruptcy clients in Wilkes, Surry, Yadkin and Alleghany Counties have made this mistake over and over again. Everything you read on the internet tells you to do it. Your banker tells you to do it. Now you know how the system is rigged against you. If you have questions about your bills, don’t hesitate to give me a call. I offer free confidential consultations.