Wednesday, September 9, 2009

Hey -- Hands Off My Mortgage!

Last spring, I made a rookie homebuyer's mistake -- I refinanced in order to shave a half-point off my mortgage. It seemed like a great idea at the time (isn't that what everyone says about anything they later regret?) but now that I'm a whole half-year older and wiser, I realize that saving a few bucks a month in the monthly payment didn't make the decision *worth it*, even considering that I didn't pay closing costs (thanks to FHA Streamline offer).

There are three major reasons why the early refi gets scored in the "E" column for error:

(1) MIP, or Mortgage Insurance Premium. That's 1.5% of the value of the note, tacked right back onto the top. This alone made the refi a terrible decision and a costly lesson learned about reading fine print. Looking back at all the paperwork, I even realize that the print wasn't even all that fine in the first place. If you have put more than 20% of the total note down, you're safe from this.

(2) Equity position. Before I owned a home, I mistakenly believed that "equity" just meant the percentage of the total purchase price that you owned as principal. That's not too far from the truth, but in reality it's assessed value minus what you still owe. So if the real estate market skyrockets, you can pull that out in the form of a Home Equity Line of Credit, or HELOC, regardless of how much you initially put down OR how much principal you've paid off. Of course, if the market goes sideways, you can still build equity by paying off principal. Now, here's the rub -- a 360-month fixed loan is structured so the early payments are interest-heavy and the later payments are tilted towards principal. But when you refinance with a new 30-year fixed, you're essentially resetting the clock on all of that. Thankfully, I learned this one year in, and not, say, five years in after I had made that much more progress on the uphill climb. Because I put nothing down, because the market hasn't gone up, and because I've made virtually no progress against the principal, I'm ineligible for a HELOC anyway, despite the amount of sense it might make for me personally in the year coming. So the refi itself isn't the culprit, but it sure didn't help.

(3) Monthly mortgage insurance. Paying MIP at closing does NOT insulate you from monthly mortgage insurance, which is basically money thrown out the window (it's now tax deductible, yes, but that's not much solace to those forced to pay it). The Big Idea behind mortgage insurance is that the bank takes a special sort of risk lending to people who can't drop 20% off the bat, so those people have to pay in to a pool that protects the banks. For those working to reach the 20% mark (and yes, that's 20% of the cost itself, so it's not the same as 20% equity), it's all about the principal. The new loan means a newly-reset clock on the principal v. interest monthly payment split, which is like Sisyphus just letting the rock roll right back down the hill. In the end, it just means more months of throwing money out the window.

So the lesson learned that I want to pass on to all friends, family, and anyone else reading is that if you're early in your 30-year fixed, think twice before refinancing, even if means you'll *save* a little bit month-to-month.

It might not be such a good idea.

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