Cost of Refinancing

Does Refinancing to a Lower Interest Rate, Lower Your Debt and Save You Money?

We are taught to focus all our attention on interest rates but by only looking at interest rates, we miss the fact that refinancing often increases our debt load, not decreases it, like many believe. Let’s first look at the cost of a mortgage. Why  is refinancing pushed as a beneficial option? Why are 1st time mortgages set up with higher interest rates that are encouraged to be lowered, via refinancing, a few years down the road with enticing lower monthly payments and interest rates? The link below portrays a $200,000 mortgage @ 6% over 30 years. Look at the first 5 years of the amortized schedule. Now look at the cost of this $200,000 mortgage. It is $231,677,  which is an interest charge equaling approximately 116% of the amount borrowed over 30 years.

click to view full 200,000 mortgage amortization schedule

Amortization schedule of $200,000 6% 30 year mortgage

It depicts $11,933.19 of interest being paid, out of a total annual payment of $14,389.20, so the  interest volume one has paid in the first year is $82.93%.

Year 1 the interest volume is 82.93%

Year 2 the interest volume is 81.967%

Year 3 the interest volume is 80.85%

Year 4 the interest volume is 79.676%

Year 5 the interest volume is 78.42%

Which equals an average of 80.768% over 5 years.

Where is the 6% interest rate you are being charged?

 The national average for homeowners to re-finance or sell their home has been 5.65 years.

The amount of interest paid over five years in this example is approx $58,000. Isn’t that over 80% that the banks are earning off you?

Where can YOU earn over 80% over a five year time frame? (I can show you how if you call me on 845-649-8487)

Why do you think refinancing is encouraged?

Why are first time home buyers interest rates a little higher?

Could it be so they will be encouraged to play the refinancing game within the first 5 to 7 years, chasing a lower advertised interest rate?

  

Now, deduct the 5 year equity build up of $13,891, the refinance costs or selling costs etc. and it’s bye bye $13,891 of equity.

Of course we are only looking at the actual math. We are not including any variables of market values rising or lowering the value of the property, which could possibly increase or decrease your equity.

So now what effect has the refinance had on one’s financial position?

1. If you refinanced to another loan of the same time frame you will be starting the 30 years all over again, lengthening the time you will be in debt. To refinance after 5 years means you will increase the time you will be in debt to 35 years, unless you decide to refinance again, extending the 35 years even further.

2. Monthly repayments will be at their highest interest percentage of each monthly repayment, starting back at month one.

3. The equity that was accumulated is now used up with the refinancing and tax charges.

4. It will take at least 5 years to recoup the above listed losses before you break even and begin to gain the advantage of the lower interest rate savings that you refinanced for. Hopefully you won’t refinance again, like many do at that point, starting the process all over again.

Every single time you refinance or sell to buy another property you are hit with closing costs and fees and taxes etc. over and over and over again. So in this example, if this couple refinanced their 30 year mortgage every 5 years, this is what the math would look like:

*5 yrs of interest paid to bank = $58,000. – Equity build up is equal to approximate cost of refinance or selling & buying fees/taxes, $13,891

*10 years, $58,000 interest paid to bank + the 1st 5 yrs. $58,000 = $116,000 – $13,891 approx cost of refi or selling & buying fees/taxes.

*15 years, 58,000 plus $116,000 = $174,000. – $13,891 possible cost of refi or selling & buying fees/taxes.

*20 years of interest @ $58,000 per 5 years = $232,000. – So far you still have no equity. After 20 years you own zero % of your home but have paid the bank $232,000 in interest charges.

Need I continue? Where else would you pay someone this sort of interest? Over 80% in 5 years.

And refinancing keeps the banks earnings at around the 80% mark. Where could you invest and earn this type of interest rate, securely?

This is why Becoming Your Own Banker is so important.

So, as you can see on the amortization schedule above, refinancing costs a lot.
Car/vehicle loans. Often, those who finance their vehicles are encouraged to purchase another, a year or two before their loan is complete for the same reason. They add the principal remaining, which is most of what is owing in the last years of your vehicles loans, to the new loan total and you start paying from scratch all over again after having paid most of the interest up front already. In fact, you are now paying a higher interest rate on those dollars that have been brought over to the new loan than you have paid if you continued to keep paying it till the end.
 

 

The conventional banking method of financing and refinancing dramatically increases your debt. However, We have to also look at the lost opportunity cost we have on the other side of the fence.

If you refinance for the longest term loan possible and for a lower rate which will free up a substantial amount of monthly cash flow, this is actually going to be more beneficial for you in the long run, so long as you understand what to do with that extra money.

So of course there are some times when refinancing makes sense and is worthwhile.

What needs to happen is to look at the numbers and the scenario’s and who owns the debt. Who is in control of the money and who is the money liquid for?

Becoming Your Own Banker is the most comprehensive and viable solution to the problem of lost wealth due to financing, available today.

Call me now, so I can show you how to recapture the interest charges that are being lost to you currently.

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July 4, 2011 · Jennifer · No Comments
Tags: , , , , ,  · Posted in: Cost of Refinancing, DEBT ELIMINATION

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