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Friday, August 13, 2010

Is It Time to Refinance?

I always seem to be out of sync with the financial cycles. When we bought our house, interest rates were 10%. Hard to believe. Equally hard to believe is that the money market account from which we drew our down payment was paying around 9%.

So horrified was I by the payments that I paid extra each month, and ended up paying off the house a few years ago. Can we say AHHHHHH? Meanwhile, and I suppose it was lucky, I missed out on all the cash out refis some of my "friends" in the mortgage biz were urging upon me.

But now...I read last night that mortgage rates are at historic lows--under 4% for 15 years. Now I don't have any immediate need for a big wad of cash (college costs are taken care of). AND I certainly can't get more than a 1-2% return on any sure thing. At the moment.

But surely interest rates will rise some time in the next 15 years, right? Or, even more surely, in 30 years. There is a school of financial thought that says "Always have a mortgage." Can you imagine how little my new mortgage payment would seem in 10-15-20-30 years? Heck, I might not make it that far.

I may do some more math on this. Would this not be a decent way to get some "income" in retirement? It would be cheaper than a pricey and complex reverse mortgage.

Any thoughts on this? Is it a crazy idea?


hostess of the humble bungalow said...

I'd take advantage of that rate and shorten the amortization at the same's after tax money, that you pay on the mortgage so any break seems logical to me...

Frugal Scholar said...

@hostess--The house has been paid off for a few years now, and even with a mortgage, I would just do the standard deduction.

幸平平平平杰 said...
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Anonymous said...

We're doing a no-cost refinance for the second time in 3 years. Rates are somewhat higher

The first was from 6.5% to 5.5. Now we're trying to go from 5.5% to 4.75%. We're paying down extra and will continue to do so unless and until other safe assets pay more than our adjusted mortgage rate.

I don't think I would actively seek a mortgage right now on a paid off house. Yes, a fixed rate of 4.3% will seem small in the future when you will be able to get a cd at 5% (how many decades before that happens?)

Right now, safe investments are making under 1%, so now, when money is more precious (b/c of inflation and present discounting), you'd be losing 3%/year. If you put the money in the stock market you could make more but you could also lose more.

Unless you have some other safe investment locked up, from a diversification standpoint, even if you think the market will be gaining more than your mortgage, you wouldn't want to take that risk of loss. If you do have a safe investment you can live on/pay the house off with and think the stock market is going to pick up at a steady clip, then it might be worth it to gamble. But you want to stay safe before trying to get bigger wins.

Another way you could take advantage is by buying an investment property, but that comes with its own hassles.

(note: not a financial planner, seek professional advice before making big decisions)

Shelley said...

There are companies here that allow you to do that in your later years; I'm thinking it might be called a 'reverse mortgage'. They'll guarantee you a certain income for the rest of your life, but then when you're gone, they own the house. There are other arrangements as well, I think, not that I've looked into any of them.

Refinancing my house is not something I would do at this point, particularly as I'm not working. I like the security of having no mortgage too much to give that up, I think. Also, given that not long ago you were a bit jittery about job security, I think I'll be surprised if you go for this, not that it might not be a smart thing to do. I don't know enough about it to have a view.

Duchesse said...

Huh? You're not getting "income" from a mortgage, it's a loan. Typically people start a business or buy an income property. Just spending it is simply incurring debt- which does not sound like the Frugal Scholar I know.

Some of my friends in their 50s and 60s downsized (children are gone) and enjoy lower property taxes and upkeep.

The Grouch said...

I don't know that interest rates can go much lower, so now is a great time to refi and lower your monthly payment, especially if you can find a loan that doesn't eat you up in fees.

Funny about Money said...

If the house is paid off, why would you refinance? You mean the idea is to take out a big loan against the house so as to extract some cash? I suppose you could invest in dividend-bearing stocks (mine are making about 7% right now) and turn a few dollars, but that's pretty risky. All you'd need is a large, permanent market collapse (not beyond the realm of probability) to lose your shirt.

A paid-off house is earning a significant return on investment, even in a market where housing values drop below what you paid for the property. Every month that you don't have to make a mortgage payment, the house is earning the equivalent of a payment. So if your payments would be, say, $1,000 a month, that's how much your house is earning for you.

Anonymous said...
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Frugal Scholar said...

@EVERYBODY--See today's post for further explanation. I'm sure most of you will remain unconvinced. I'm kind of unconvinced myself.