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Many years ago, when I was a loan officer, clients would call in about an advertised rate because they wanted bragging rights that they lowered their rate by perhaps 1 point. The purpose of this blog is to show you how this is not always the wisest financial move you can make. I am going to show you why it is that it makes NO sense to lower your mortgage rate by 1 point, yet keep high rate credit card balances at the same time. The loan officers at 7th Level Mortgage will take the time to go through all the numbers, as I am going to provide you with an example of what happens if you don’t take cash out of the property to pay off the property and the credit card payments you are planning on keeping. One of the things I hated the most was the first of every month when bills were due and I had to send out multiple checks to my creditors.
In this example, let us assume you have a mortgage amount of $100,000 and your principal and interest payment is $484 per month at a rate of 4.12%. The current 30 years fixed mortgage rate is 3.121%. The principal mortgage payment would be $428. The savings would be $56 per month, HOWEVER, the costs of the refinance have not been calculated into the new payment. You will find very quickly that the 1 point you saved is eroded each and every month by the costs divided by the savings. In this scenario, let’s assume $3000 for costs. It would take almost 5 years to recap the costs before any savings are realized. If you are planning on being in the home for less time than that, obtaining bragging rights about your rate would make no sense.
Let’s take the same 100,000 dollar mortgage balance at the same rate of 4.12% BUT add in credit card debt. The average US family is carrying $5,700 in credit card debt. The average credit card interest rate is 16.28%. Assume you are paying $150 per month on your credit card(s). It would take 53 months to pay off the credit card. The total amount of interest on the card would be $2,223 and the principal owing would be $5700. When you look at the 5 years turnaround time to recuperate the closing costs to give you those so-called “bragging rights” about your mortgage rate, you are underwater by 5 years in mortgage-related costs, and also you have lost 4 and a half years in excess interest paid to your credit card company.
Let us now combine the outstanding mortgage balance and the credit card balance and calculate the payment (again without taxes or insurance because those are a constant) and the savings.
$100,000 mortgage balance @ 4.12%= $484 per month
$5,700 credit card balance @ 16.28%= $150 per month
$105,700 balance $634 per month
By combining the two loans of:
$105,700 the new payment is, at 3.12%, $453.
Would you rather pay $453 per month and have the interest fully tax-deductible or continue to pay $634 per month? That, over 7 years (the average a person stays in the home or sells it), would be $15,204. If you were to stay in the home for the full 30 years, the savings would be $65,160! If you were to just refinance the primary mortgage, you would still not be getting the full benefit because the costs would take 5 years to recuperate and you would still be paying $150 per month on a credit card, where the interest is NOT tax-deductible. A smarter decision would be to call 7th Level Mortgage TODAY and have the loan officer calculate a new payment plan for you so you can breathe and sleep easier and free up ready cash for your home or maybe a much-needed vacation after dealing with the pandemic.