RapidDebtLoss.com

It never fails.  A relative of mine called me about refinancing their car and then the conversation switched to the home.  After discussing the options available it occured to me that I was once there thinking of playing the refi game also.

I used to have a ‘99 Isuzu Rodeo and I was tired of the $330, 5 year (13.9% interest rate) monthly payments and wanted to do something about it. I searched the Internet until my finger prints wore off and found great interest rates I could refinance at.

Then there was a problem.  I started thinking…

After paying for 2-3 years on the car, I’ve had enough with the high interest rate. But if I was to refinance, my payments would’ve been lower but the number of payments would have increased. To put it in layman terms, I would’ve paid for the car twice.

Same with my house. I wasn’t always this financially crazed Deity that knew it all.

In 2001 we bought our house on a 30 year 6.85 fixed interest rate.  In 2003 we refinanced it to 5.875%. Luckily not much was lost.

Others aren’t as fortunate.  Imagine owning a house for 15 of those 30 years and wanting to refinance.  Most people refinance again for 30 years.  Of course you’ll have a lower payment but you’ll be paying more in the long run. In effect you’d be paying 45 years (15 (already in)  + 30 more) for the home when you should only been paying for 30 years.

For instance, let’s say you took out a $100k loan on a home @ 6.85%. You’re looking at $650/month.  15 years later  you owe $74K (and have paid $91K in interest).  Now you refinance that $74K @ 5% for 30 years and your payment is now $536/month.

So basically, you’re willing to save $114/month for 15 extra years of payments. Not to mention you’ve wasted $91K in interest over the last 15 years. And guess what? The new refinanced loan will be just like the previous loan meaning that the first 10-15 years you pay your loan will be applied to mostly interest.

Same with a car.

The only time to refinance would be when you haven’t been in a loan for a significant amount of time and the interest rate is at least 1.5% lower than your current rate.  If you do finance, make sure you finance for the life of the loan you’re currently financed for.  So if you’re into year 10 of your thirty year loan and the interest rates are unbeatable, refinance for 15 years or 20 in order to not be paying twice for the home.

Something to think about when you’re ready to pull the refinance trigger.  Of course, I’m here all week and don’t forget to tip your waitress.