A friend emails me and says
“Hey can you take a look at this for me? Does $9,000 on closing costs seem high?”
I pick up the phone and call her immediately. My first question, “What are you trying to do?” She says, “Lower my rate and shorten the length of the loan.”
She had a $230,000 loan amount on a 30 year fixed loan at 4.25%.
She had called one of those radio/Super Bowl ad type lenders that tell you you should consider acquiring six figure debt because it is as easy as pushing a button on a vending machine. You know the ones right? They will shoot you to the moon, or their money grows on trees? Are you with me?
Her quote was a 15 year fixed at 3.5%. And told her The total interest paid over the life of the loan would decrease by as much as $100,000. (WOW!!)
Lower rate? From 4.25% to 3.5%–CHECK
Shorter Term? From a pay off date of 2046 to a pay off date of 2035–CHECK
The closing costs weren’t actually $9,000 as she thought. They were $6,780.00 which consisted of roughly $2,000 for the cost of title work, recording fees and an appraisal. Oh, and TWO DISCOUNT POINTS. The other $2,220.00 was interest until the first payment was due and money to set up her escrow account for taxes and insurance, which she would get back from her current mortgage account.
Her payment would go UP $503.32 per month.
PROBLEM. Here original loan from July of 2016 was $245,000. It was down to $230,133.81 when we spoke. If paying it off quickly is her goal, should she really ADD $9,000 to her balance? Right now she has 27 years left on her current mortgage and making the payment next month is FREE–no appraisal, no underwriting fees, no new title work–just 4.25%.
If she really wants to pay the loan off quickly (I think that’s a bad idea, but a different topic for a different day) how fast could she pay the loan off just leaving everything alone and adding $503.30 to her monthly payment? Interestingly enough, in almost exactly the same time frame as a refinance–I mean within a FEW MONTHS. See below
- No change in routine
- No change in who to pay
- No documents required
- No appraisal needed to be scheduled
- No need to schedule to sign paperwork
- No $9,000 increase in loan amount
- What if she decided to sell soon? It would take a full year just to get back to $230,000, and if she would have just made extra payments to her current loan, her balance by then would be $221,400, another $8,600 lower!
- No forced increase in payment by $500/month
- What if something happens and she didn’t want to pay an extra $500? Or couldn’t?
Needless to say, she was able to keep a structure that worked for her cash flow and equity objectives, reduce her risk of loss, increase her flexibility and not do a single thing. What could be easier?
BOTTOM LINE: Be careful what you ask for. She was offered exactly what she asked for. A lower rate and a shorter term. Many people are really good at selling loans. It is easy to sell someone on the idea that they are “saving money in the long run”. It is really easy to get people to fixate on interest rate (doesn’t EVERY ad do this?) YOU CAN get a mortgage from a vending machine today. But you also need to know which button to push. Having a seasoned professional that takes the time to help you identify your long and short term financial goals is vital in answering that question. If you would like someone to review decisions like this with you when you are making them I can be that seasoned professional. Call me (720) 608-0013 or email me firstname.lastname@example.org.
This is a decision that has a big impact on your wealth, it is worth making sure it is the right one.