The best we can do is work with the information we have available.
- Financial mishaps are often caused by rash decisions.
- Refinancing a mortgage only makes sense if you’re going to live in a house long enough to recoup the cost of refinancing.
As long as I’m being honest, I should probably tell you that I’ve made more than one mistake while refinancing a mortgage. And like many mistakes in my life, I might have avoided them if I’d waited a bit longer to see how life unfolded.
Jumped the gun
When we first purchased a home in Michigan, my husband was new to the auto industry, and frankly, we weren’t sure how long we’d be in the house. We took out a balloon mortgage, which was far more common before the housing market crashed in 2008 (for good reason). Although we qualified for a traditional mortgage, we were attracted to the low interest rate associated with a balloon mortgage.
How it works
A homeowner makes a monthly payment for a set number of years – typically, between five and seven. At the end of that time, the entire mortgage balance is due. Say someone borrows $200,000 for five years. Rather than amortizing the mortgage over five years (which would lead to a higher monthly payment), the lender amortizes the loan over 30 years.
The homeowner has a low monthly payment but has paid little toward the principal at the end of five years. Once the balloon comes due, that person must either take out a new mortgage to pay off the existing mortgage or come up with enough cash to cover the entire balance.
A balloon mortgage could be a viable option for someone who doesn’t expect to be in a home for more than five to seven years. Anyone else needs a solid plan in place.
Interest or no interest
At the time, many lenders offered “interest-only” balloon mortgages. Anyone who signed up for such a mortgage paid nothing toward the principal and built zero equity in their home. We didn’t want to do that.
The average mortgage rate on a traditional loan the year we purchased that house was just shy of 8%. We were offered a rate of 6% and thought we got a steal. The balloon wasn’t due for five years, but once it became clear we were staying put, I began to watch mortgage rates.
Two years after we moved in, the average mortgage rate was over 9%. I can’t say that I panicked, but I did become concerned. A decade earlier, we’d seen the average rate hit 18%, and the more I thought about it, the more convinced I became that we were headed in that direction again.
A rash decision
One day, I picked up the phone, called a lender, and got the ball rolling on refinancing the house. And because I was so caught up in the “should I or shouldn’t I,” I broke the cardinal rule of borrowing by not shopping around for the best refinance lender.
To this day, I can’t tell you how much we paid for that loan because, at that point, my decision was driven by emotions, and I was not paying attention to the details. All I knew was that I wanted out of that balloon mortgage, and I wanted to lock in an interest rate before they skyrocketed.
A few years later, when we were actually due to refinance the balloon mortgage, rates had dropped rather dramatically. Had I not made such a knee-jerk decision, we could have saved money.
A new day, a new mistake
As of early 2021, we’d been living in our current house for a few years and wanted to take advantage of the low rates ushered in by the pandemic. I really adore this house and had convinced myself that I want to live here until I’m too old to get up and down the stairs. It was in that fog of wishful thinking that we went through the refinancing process.
Given the number of times we’ve moved for my husband’s career, I should have stopped to wonder how long I could realistically expect to remain in the home. Shortly after refinancing, my husband decided to take a job in another state, and it occurred to me that I would never have paid to refinance the house if I’d realized we weren’t going to be here long enough to justify the cost. We still owe $3,000 more on the mortgage than we did prior to refinancing, and while that doesn’t sound like much, it irritates me every time I think about it. That’s $3,000 less to invest in the future.
I realize that being smart with money would be far easier if we had a crystal ball telling us what’s just around the corner. Instead, all we can do is weigh our options to make the best decision possible at the moment.
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