Everybody has heard!  Interest rates have gone back down into historically low figures again.  Now is the time to refinance your home!

Hooray!  Let’s refinance!  Or should we?

Here are 5 Reasons Not To Refinance Your Home

Before we share the reasons, it is important to acknowledge everybody’s loan situation is completely different.  Different amortization years, loan amounts, and interest rates.

We are using these parameters for the article:

  • Original Home Purchase Value: $250,000.00
  • Down Payment: 5%
  • Amortization: 30 years; fixed.
  • Original Interest Rate: 4.50%
  • Refi Interest Rate: 3.75%

Here are 5 Reasons Not To Refinance Your Home

Five Reasons You Should NOT Refinance Your Home

1. Front Loaded With Interest

Before you start calculating your monthly savings, it is important to understand how mortgage payments work.  During the first 10-years, you primarily pay more interest than principal.  The last 10-years you pay primarily more principal than interest.  This is to protect the lender and debt capital, they make sure they are always ahead of the risk curve in case of a default.

When you refinance within the first 10-years, you remain in the ‘primarily interest’ phase.  For our example, you pay $98,777 in interest and $46,799 at the end of Year 10.  Compared to $28,730 in interest and $116,878 in principal for Years 20-30.

By refinancing, you reset your back to pay 2:1 in interest-to-principal.

2.  Another Origination Fee

Don’t be fooled by lenders who encourage you to ‘take advantage of these interest rates’. Lenders make their revenue by charging Origination Fees; which are typically 1.0-1.5%.

Luckily for you, often the savings on your monthly mortgage can be in your favor after 2-4 years.

3.  Moving Soon – Lose Out on Principal

If you intend to sell your home within 5 years, you should not refi.  Instead, you should continue to make your more expensive payments since the ratio of interest:principal will start to increase in your favor.  The ratio of principal paid per each mortgage increases.  Avoid the 2nd origination fees and going back to the beginning of an amortization by continuing with your existing mortgage.

4.  It Cost You More In The Long Run!

Yes.  You read that correct.  Refinancing in this scenario will actually cost you MORE money over the lifetime of both loans!

Your lender will show you how much you can save from this refi over 30-years and on a monthly basis.

Truth: Monthly savings will increase if you refinance your home.

Lie:  Life-time savings will decrease if you refinance your home.

Lenders like to compare your current 30-year note to their proposed 30-year note, which indeed will be a saving.  However, you must factor in the prior payments you have already made; your new loan should be viewed as a 5-year plus 30-year.  Combined, that new 35-year loan will not save you money.

After 30 years, you paid off $237,000 in principal and paid $198,090 in interest.  Totally $435,590.

After 35 years, remember you have to include the first 5 years on Original Loan, however you paid $237,000 in principal but $200,195 in interest.  Totally $437,695!

How can this be?  The two biggest reasons are:

  • The first 5-years of any loan is primarily interest (2:1 ratio), a refi puts you back into the heavy-interest first 5-years again.
  • The additional origination fee.
Refinance Your Home Mortgage

Five Reasons You Should NOT Refinance Your Home

Why Refi?

While it is true that your monthly cashflow will increase from a refi, your long-term earnings will not.  So, should you consider never refinancing your home?  No.

For individuals looking to reduce monthly expenses and increase their cashflow should consider refinancing.  Real estate investors and landlords can benefit with increased cashflow, adding an extra $100-200 per unit into your pockets can significantly accelerator your ‘Financial Freedom’.

For primary homeowners, if you know you will stay in the house for decades and want the reduced monthly cashflow then amortizing an additional 5-years can help.

There are a lot of other perks to refinancing, including Cash-Out.  If your home has appreciated enough, you can refi and actually take cash out.  Often times landlords will refi-cash-out and use that money to buy another rental property.  In fact, that’s what I did for my 2nd property.

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