I was reading an article about whether a homeowner should refinance their mortgage. You can see the article here: http://finance.yahoo.com/expert/article/mortgage/209888
While the article makes some good points, it misses a couple of important items when making such a decision.
1. If your monthly cash flow is really tight, or if your income fell so that you’re having trouble making ends meet, then refinancing like this makes sense. Of course, the person in this case would be saving over $900 a month – not a bad thing.
2. But if you want your house paid off earlier, then keeping the existing mortgage makes sense. After all, after five more years of payments, the balance is $86k lower than if this person refinanced. Again, not a bad thing.
Wait! What’s the right choice then? What’s missing?
Assuming that the homeowner saves the difference in monthly payment, after five years, that $57k total grows to around $62k with interest, assuming 4% after tax. Plus adding in the greater tax deductions (remember you pay more interest, but that also means more tax deductions!), the total ‘cost’ of refinancing is around $22k.
On the surface it still seems like a bad deal, right?
But what if this homeowner lost their job? Or had an emergency? Liquidity – being able to access the money – and having control over it are two of the most important aspects of finance people forget about.
After all, how could this homeowner get their equity out as cash if there was no job? Or if their debt-to-income ratio was too high with the original payment?
Equity in a house is not liquid, nor do you have control over it. The bank has control over it and if they don’t feel like lending today, well, too bad for you.
Despite the ‘cost’, refinancing may be the better deal. Isn’t having liquidity and control worth it?
Instead of a trivia question, I want to recommend a book I just finished reading. It’s called Master Your Money Type by Jordan Goodman. This book is about the emotional aspects of money and trying to understand how your psychology, fears, beliefs, etc. play a huge role in your finances. I wasn’t in 100% agreement with the some of the specific financial advice, but the emotional aspects were very enlightening. It was published in 2007 and is a fairly quick and easy read.
