Comments on: The Value of a Mortgage Refinance

By: Paul Williams

Paul Williams — Fri, 18 Jun 2010 15:49:56 +0000

Thanks, Kevin. Please know that generally I’d agree with you. People tend to abuse their ability to refinance a mortgage and end up making things worse for themselves. But we shouldn’t dismiss a viable strategy/option just because it can be abused. Debt can be used well or used poorly. Money in general can be used for good or evil. Those facts don’t make debt or money inherently evil – it’s what we do with debt or money that matters most. Thanks again for taking the time to share your thoughts!

By: Kevin D

Kevin D — Fri, 18 Jun 2010 15:33:29 +0000

Good thoughts, Paul. You are right, there are situations where it makes sense.

By: Paul Williams

Paul Williams — Thu, 17 Jun 2010 21:53:18 +0000

Kevin, I had another though more directly related to your comment and this article. There are times when it can be useful for someone to refinance at a lower rate using another mortgage with the same term as their old one. If you’re in a tough financial situation and have cut costs in all possible areas, refinancing can be one way to lock in a lower rate and payment on your mortgage. Then, once you’re back on your feet, you can focus on paying off your debt early if that’s your goal.

Again, I’m not saying that it’s good to do this without a plan in place. But it can be valuable in certain cases (but it’s rare that such a thing is used wisely).

By: Paul Williams

Paul Williams — Thu, 17 Jun 2010 18:25:27 +0000

Thanks for sharing your concerns, Kevin. I understand where you’re coming from and what you’re saying. However, I would still say that refinancing can be valuable despite extending the loan period and the closing costs.

Just because you refinance doesn’t mean you have to live with the extended loan period. You have two options when you go to refinance. You can take a shorter loan period than what you had before OR you can pay more than the required payment so you pay off the new mortgage early. I know many people refinance just to lower their payment so they’ll have more to spend elsewhere. That’s almost always a foolish move and I wouldn’t recommend it. However, if you can go from a 7% rate to a 4.5% rate and use a shorter term mortgage or focus on paying it off early, I’d tell you to go for it. That’s a smart move.

When it comes to closing costs, all you need to do is focus on your payback period. Take the closing costs and divide by your monthly savings from refinancing. If you’ll keep the mortgage for at least that many months, then there’s no problem with the closing costs. However, I’d also recommend you do everything you can to negotiate the lowest closing costs possible.

Again, I agree that what you’re saying would be a bad way to handle your debt. But just because something can be used in a dumb way doesn’t mean it can’t be useful for those who are wise.

And thanks for the compliment at the end. I’m glad you’ve enjoyed the site so far!

By: Kevin D

Kevin D — Thu, 17 Jun 2010 17:48:52 +0000

I am disappointed to see this ad on this site. Sure, refinance can be great but there is one glaring omission-your debt has now been extended! If I am 10 years into a 30-year mortgage at 7% and refinance at 4.5%, I just reduced my principle payment and extended my loan! Plus, there is hundres (or thousands) in fees that could be used to pay down principle. It’s sad, people keep moving and refinancing and then find themselves 40 years into home “ownership” with 20 years left on their mortgage. I do not see how being a slave to debt for an extended time is assumed to be “immensely valuable” Waiting until I have a larger down payment and getting a 15-year mortgage is far more valuable. That way, my money can work for me instead of for the bank.

Other than this post, this is a great site! Great content.