For many people refinancing the mortgage is something they should SERIOUSLY consider. Interest rates are at all time lows lately, and with the housing market starting to rebound interest rates will soon begin to rebound upward as well. Two days in a row I got an offer from the bank to refinance my mortgage, and I posted something on social media about it not being a good deal that seemed to cause a little debate about cash flow and investing (debate taken down now – wasn’t productive). So I’d like to clarify what my intentions were and my personal position on cash flow and investing particularly as it relates to home ownership.
First, every persons situation is different with regard to their mortgage, their monthly cash needs, their investment strategy (which involves risk tolerance), etc. I’m not an investment advisor but I’m pretty sure they evaluate a persons unique circumstances and preferences before advising. So – I’m just sharing my unique circumstances and preferences, not advising.
The reason I would say “not a good deal” for me is because the offer I received was suggesting I take more monthly cash flow now in return for paying more long term interest (a lower interest rate for a longer period of time is more total dollars in this case). So all I was doing is sharing that the offer isn’t a good deal…for me.
(Keep in mind our story. We almost lost our house when times were tough and were fortunate enough to get a re-do with the mortgage company at the end of 2006. So I have a special perspective for the house being a basic survival need rather than an investment vehicle. I know we could rent or live in a tent, but it would be way more awesome if we had a paid for house.)
I already refinanced back in 2010 from 6.72% down to 3.875% and moved from a 30 year mortgage with 26 years left down to a 15 year mortgage. My payment went up only $8 per month to do this and I shaved 11 years off the payoff. That’s exciting enough, but what really cemented this decision for me was the difference in long term interest is a LOT less. So that deal made sense for me. The new offer was basically asking me to go back in the other direction – back to a 30 year mortgage, lowering my payment by $380 per month, but paying more long term b/c of all the 12 additional years of payments.
The possible reasons for taking a deal that extends the loan to improve monthly cash flow are countless.
- “What if you need that extra money every month to pay bills?” At least for now and the foreseeable future that isn’t the case for me, but if it were then that’s a factor to consider.
- “What if you invested that extra money every month and earned more than the mortgage interest and reduced tax credit?” I already save and invest with a fairly balanced approach (for my risk tolerance) and my house is one of my safe investments (although I don’t think of it that way very often).
- “What if you’re upside down on your house?” I’m not, but if I were then I would take in to consideration whether or not a losing investment is worth paying on faster (but I am in no way whatsoever saying it’s ok to walk away from homes that are upside down – there are moral options available for those situations)
- etc etc etc – I could go on and on and the fact of the matter is everyone has to evaluate their own situation to determine what’s best for them.
Here’s why I’d rather keep my payment where it is and finish paying off my house faster rather than freeing up monthly cash.
- We’re not upside down on our house, so every dollar I pay down is another dollar of equity. It’s not going up in value the way houses were before, but I’m not as concerned with that as I am having a roof over my family’s head. The closer I can get to having a paid for house the better chance I have of never facing the prospect of being homeless or paying rent – forever! We don’t plan on moving either and we’ve learned to be content with our modest home.
- I don’t think of my house as a short term investment – it’s a long term investment. And like I said above I don’t think of my house so much that way. The truth is people thinking of houses as a 3-5 year investment is what caused a housing bubble to get real big and pop in the first place. Keeping it even more real let’s ask the question – were most people buying houses they couldn’t afford at the peak of the housing market (with economists saying there’s a bubble about to burst) as a sound investment or as a sinful and prideful desire to satisfy some craving for material possessions or status?
- I’m doing ok month to month with my giving, saving, and investing goals and living a modestly comfortable lifestyle. So we don’t NEED the extra monthly cash flow right now. Let’s just be real and admit that most of us wouldn’t save/invest it anyway. We would spend it on stuff we don’t need to impress people we don’t like (or they don’t like us), or worse yet to fill a sad void in our life that stuff will never fill.
- I’m saving at least a little bit for our kids college and planning to have the house paid off before they go so that we can float some of the cost of college with the money we’ll no longer be paying on the mortgage. This is a conservative approach, but I feel that I more than make up for it with other risk in my life and investments.
Ok, enough on this. Hopefully it helps someone see that every situation is not the same. We all have to at least educate ourselves on a general level about the options available so that we can devise a strategy that works for us. As for me and my house – we’re hoping to lose the mortgage sooner than later.
PS – I will not be posting this on social media, but I welcome comments here and will respond if you prefer to email me directly via the contact link