Refinancing your home is NOT a bad thing…
“I don't want to refinance because it feels like a step back”. It's something I hear all too often, so let's take a minute to de-bunk some common misconceptions about refinancing and debt.
Does this sounds like you:
You work hard and earn a good living, but no matter how hard you work, or how much money you earn, you still seem to be “broke as a joke”. Why? You make a lot more money than you did 2 years ago, so what gives? Your debt went from a couple thousand on the Best Buy card, to $45,000 on multiple cards in what seemed like overnight. As a result, you and your spouse are now fighting about money constantly. You're snapping at the kids for no reason at all, and your co-workers aren’t exactly getting you at “your best”. You are stressed to the max. Heck, you haven’t even taken a real holiday in 2,436 days.
However, all is not lost, for you are an absolute savage when it comes to paying off your mortgage. At a young age, your parents ingrained in your mind the good sense to focus on paying off your mortgage at all costs. That the mortgage needed to be paid off as fast as humanly possible. Since you have always done everything your parents have told you, (heavy on the sarcasm) you made it your mission. You took a 25 year amortization instead of a 30 year in the beginning. You increased the payment, and you pay your mortgage payments bi-weekly and accelerated to ensure it’s paid off quicker. You would miss your child’s birthday before you miss a mortgage payment. You even pay an extra lump sum each year to get this bad boy down to $0 as fast as possible. If there were a mortgage payment superhero club card you, my friend, would have one.
Mom and Dad are proud. You are doing exactly as they taught you and are paying off that nasty mortgage with a rate of 2.95% so fast, it’ll be gone before you can say “poor decision”. Good work!!
See what I did there?
What your folks forgot to mention to you was, their mortgage was 15-20%. To them, the mortgage WAS the worst thing ever and if they didn’t pay it off fast, they may never pay it off. Add to that, they weren’t really a part of that “must have it now” generation. They didn’t collect debt like hockey cards the way we do today. They had layaway. They waited until they had the money and didn’t get into debt the way today's generation does. They couldn’t. All their money went to paying down the mortgage! So their advice, albeit wise, genuine, and from the right place, doesn’t necessarily apply to your current situation.
So, let’s discuss your situation then.
Debt is debt. Period. If your mortgage is $250,000 and you owe $45,000 in consumer debt, then your total debt is $295,000. The goal is to pay that debt down as fast as possible so as not to incur more interest charges.
You don't have to be a math wizard to know that 2.95% is much cheaper than 29% or that paying down a debt being charged at 29% vs. a loan at 2.95% would allow the debt to be paid down much faster. Worst part is, you know that already, but you just cant help yourself. Time for a change. For those that are visual learners, here is an apples to apples comparison.
$45,000 at 29% = a total annual interest cost of $13,050, or $1087.50 per month.
$45,000 at 2.95% = a total annual interest cost of $1327.50, or $110.63 per month.
Both examples are just interest payments and the interest was compounded monthly. You can see that if you paid $13,050 on the 29% card, you would still owe $45,000 after each year since all you are paying is interest. If you paid that same amount on the 2.95% debt as you do on the 29% debt, you would be left with roughly $33,277 after year one and roughly $21,210 after year 2. It would take only 3.5 years to pay it off in full vs eternity with the other, high interest card.
So, how can you take that 45k debt at 29% and lower the rate dramatically? Wait for it….Refinance your home!
Refinancing your home to use some of your equity to pay down the external debt can be a huge problem solver if that is an option for you. I realize you feel like you are undoing all the good you have done and moving backwards, but I assure you, you aren’t. In fact it will be the opposite. You will be further ahead in the long run. Think of those extra payments you made on your mortgage as savings, and you are using that savings now to pay out the debt that you should have been doing earlier. You are now just seeing things differently. What’s very important to understand is, you aren't adding any new debt (even though it feels that way), you are simply moving it from one place to another. You already have the debt, you have just found a way to manage it better.
Add to that all the benefits - You now go from having to make 3,4 or 5 separate payments on all the credit cards to just one mortgage payment. You have eliminated those massive interest charges. Your credit score will rise dramatically by owing nothing on your credit cards. You have lowered your monthly payment by hundreds of dollars which, aside from the obvious monetary savings, will help alleviate the stress and anxiety, and just maybe, will now allow you to save for a much needed holiday with family. Your health and sanity is just as important as the interest savings itself, if not more important. And with all the prepayment options available still, you can still pay down the mortgage faster, if you want, now that you have extra cash each month.
You need to rewire your brain to understand that the debt outside of your mortgage is worse than the mortgage itself. Stop thinking mortgage is a bad word. I mean, the word ‘mortgage’ itself, loosely translated, means “a secured loan at an insanely low rate”. (Please don't fact check that. I can't back that up, but it’s very true). Once all the external consumer debt is gone, then go back to your badass, mortgage payment superhero ways. But until then, get out of your own head, stay out of your own way, and let the numbers make the decisions from now on.
Don't worry, Mom and Dad will still be proud. I promise.
If you have questions in regards to this blog or if you are wondering if you have enough equity to refinance your home, we’d love to hear from you. You can reach out to us at firstname.lastname@example.org or you can hit us up on our website at www.wespauls.com or our social media platforms.