BLR at their lowest
levels in decades, many people are refinancing. But a trend that seems
dangerous to me is that rather than using this as an opportunity to shorten
the life of their mortgage people are just reducing their payments.
Why would paying less on your monthly mortgage be bad? Paying less to the
bank sounds like a good idea! The reason why I said this is a bad idea is
because many people are using this as an opportunity to increase their debt.
Because they can afford the payment on a larger debt they are simply
spending up to the limit. People who do this will never get out of debt and
will remain slaves to the bank for their entire lives.
1st Choice- Refinance to reduce the life of your loan
Remember the old song "16 tons" which spoke of shoveling coal all day long
and just ending up another day older and deeper in debt. Not even being able
to die because I "owe my soul to the company store". Today people have an
opportunity to get out from under and they aren't taking it.
About a year ago, lower rates allowed me to reduce my mortgage from 25 years
remaining to 15 years remaining with the same monthly payment. Today I am
looking at refinancing again. Because I will be able to reduce it to 10
A 30 year mortgage at 7% will end up costing you almost twice the amount you
borrow, over the life of the loan. While a 10 year mortgage at 5% will only
cost you about 30% more than the amount borrowed. So in addition to
eliminating the aggravation of a mortgage starting 20 years earlier you end
up saving roughly 2/3 of the price of your house in additional payments!
* I strongly suggest anyone who can possibly afford the payments to reduce
the life of the loan any and every way possible!
* Don't increase the amount you borrowed unless you absolutely have to.
2nd Choice- Reduce the amount of your payment
If reducing your payment will allow you to pay off higher rate debt like
credit cards by all means do it. But don't fall into the trap of just
spending the extra and keeping your cards maxed out. Eliminate interest
payments everywhere possible.
Worst Choice- Keep your payment the same and borrow more
By simply refinancing and taking the equity out of your house, this is a
sure way to "owe your soul to the company store" in this case the bank.
Don't do it! The common rationale for doing this is to be able to pay off
lower cost credit card debt or doing other investment but what you are doing
is exchanging short term debt for long term debt. Then most people with
credit problems go out and rack up more short-term debt. If you have
excessive credit card debt use option #2 to reduce your mortgage payments
and use the money saved toward reducing your credit card payments. That way
you keep your equity building up and develop the habits necessary to reduce
your debt. A one time reduction in your debt is not going to change the
habits that got you into debt in the first place.
Check with your banker to get an idea of what the current rates are. If you
are paying more than 1% above these rates in market, quickly ask for
refinance and stick to #1 & #2 choice as your guide.