Monthly Payment or Pay Down

Got a call couple of weeks ago asking if I thought it was a "good move" for the someone on the phone to refinance their current home loan.  The current loan was just under 6% and they had about 18 years left to pay off the loan. I opined that it would likely be a positive since both 15 year and 30 year loan rates were at least one percent less than their current rate.  The question went something like this, "we want to refinance at a cheaper rate and extend our loan back to 30 years so as to lower our monthly payment and therefore have lots more cash to spend each month"  I noted that the idea was not very wise and suggested that they refinance at 15 years with a rate over 2 percent less than their current rate and still would have a lower payment and quicker loan payoff.  My idea went to deaf ears.

 

I know from experience and what I am told from professionals in the loan business that the idea presented to me is a regular part of the business. People are continuing to use their home as cash registers. This time not using home equity loans, but using lower rates to the same effect. When will people learn? When will we get back to old fashioned thrift and doing things that do not put your life, home, or job at risk? You would have thought that the just past financial downturn would make people afraid to take such chances. But frankly the problem is that the US government plays backstop to everyone who make decisions such as this and so no one pays for these decisions expect taxpayers. The person ends up not paying their mortgage and the government steps in rescues them by stopping foreclosures so why not take the risk I suppose.

 

Years ago the idea was to have your home loan paid off before you retire.  I remember people having home loan paid off document burning parties. But not anymore. The most important thing today is a lower monthly payment forever, but never pay down your home loan. What are these people going to do when they tire of working, have nothing saved to retire, and still have 10 years or more to have a paid for home. Trust me there is not enough money that the government can tax to cover your bad decisions then.

 

So the answer is get wise and work towards having a paid off home loan sooner rather than later. Take advantage of this lower interest environment to increase your paid off principal, cut your years of payments, and get freedom from debt.  Today you can get a home loan for 15 years at 3.5% or less, take advantage of this once in a lifetime opportunity to refinance or even buy a home. A home to live in, not something to buy and hold for flipping.