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How to Negotiate a Mortgage Loan Modification With Your Lender

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Thinking twice before refinancing home or car.

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.

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Is it better to rent or buy?

Real-estate agents have been pushing the virtues of homeownership since homes were invented. Or since real-estate agents were invented, anyway. Paying a mortgage, they insist, is a can’t-miss investment (the tax breaks, the appreciation, the thrill of fixing your own roof!). Renting is for simpletons who don’t like keeping their own money.

But does owning a home really trump renting? With the economy stumbling, house prices falling, and credit tightening, many housing experts are questioning the conventional wisdom. “Over the last decade, it may have been true,” says W. Van Harlow, an economist at the Fidelity Research Institute. “Clearly, there are periods where [the housing market] will dominate. But give this market correction another 18 months, and it may not be true anymore.”

Not so hot. The housing boom produced endless stories of homeowners getting twice what they paid for their homes. But “prices don’t always go up,” says Jay Butler, director of realty studies at Arizona State University. Even a boomtown like Phoenix has seen median rates of appreciation climb only 4.6 percent a year since 1981. According to a Fidelity study published this year, the return on a dollar invested in real estate in 1963 barely beat that of a low-risk treasury bill.

When the housing market slumps—as it has every 10 or 15 years for the past several decades—homeownership becomes little more than renting, from a bank. Without appreciation, buying a $400,000 house—instead of renting the same property for, say, $2,000 a month—can turn into an expensive, potentially money-losing proposition. Assuming home prices come out of their death spiral (prices fell 4.5 percent in the third quarter compared with last year), they would still have to appreciate at 4 percent every year for a decade—even if rents climbed well above the rate of inflation—before a family would save more owning than renting. An $80,000 down payment could be invested instead in a mutual fund earning 8 percent, and housing comes with myriad other expenses, from maintenance to insurance to taxes, none of which build equity. Tax breaks do ease the pain. But with the average family staying in a house only six years, homeownership during a slump (especially in foreclosure pits like Las Vegas and Tampa, where prices have dropped more than 9 percent since last year) can look less and less like the American dream.

Renting, meanwhile, has its virtues. It’s cheaper in the short term, it offers maximum flexibility, and it pushes the headaches of maintenance and taxes onto landlords. It can also be a sound long-term investment. According to Fidelity, if renters save even $300 a month—the difference, say, between their rent and a monthly mortgage payment—that money, invested in stocks growing at only 4 percent, could add up to $114,000 in 20 years. (And that’s on top of earnings on a down payment that never had to be made.) “Over long horizons, if you reinvest the savings,” Harlow says, “you’re probably not going to find that much difference between renting and buying.” Saving hasn’t proved to be the national forte, of course. But with the bloom off the homeownership rose, it may have to be soon.

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