Thursday, February 14, 2013

Refinancing/A Reflection

Debt. We all hate it. We live with it, and those of us who are lucky, manage to dig our way out of it.

I recently thought about this subject again in response to a question on lowering interest rates. The lowering of interest rates has been a Godsend to those seeking to lower their housing payments.  We bought our little house in Alameda,CA in 2000. At the time we did, we had the first mortgage at 9% and a second at 12% to avoid having to buy mortgage insurance, all on a 30 year term. We were paying close to $3000 a month (without adding in property taxes) on the house.

Now, we are at 3.67% and will finish paying off the house in 12.5 more years, paying out $1688 a month on the regular payment, and an extra $400 toward principal every month. That's the plan.

What strikes me about this, is what we were willing to pay initially to be able to buy a home in the Bay Area. Housing costs in the Bay Area are steep.  We worked a variety of jobs and took on all sorts of odd jobs. We all carried our lunch to work everyday. We lived within a budget (we still do). We often worked 12 hours a day, most days.

And I don't think we were or are alone. I think this is typical. The American dream of owning your own home is strongly ingrained in us. In all of us.

That is why the housing crisis in the U.S. was, and continues to be, such a crisis. It strikes at the heart of what we think we can aspire to--a piece of land we can stand on and call our own.

Refinancing helps. But although rates are low, it is extremely difficult to refinance now. We patiently (and sometimes not so patiently) went through a very long period of time of providing information on the tiniest details of our financial life. And the process seemed to drag on forever.  I am hopeful, that this move will help us pay the house off faster. Every month, I see the effect that the additional payments make on the overall debt, and it is encouraging.

I am concerned though, that many people will fail to refinance. This may be the last time in our lifetimes, that we will see rates this low.  The Home Affordable Refinance Program (HARP), a federal program to help people refinance who are in trouble with their mortgages, ends in December 2013.

And with the housing market starting to come back, it is unlikely that rates will remain low much longer.  And with rising housing costs, present homeowners may find that their equity in their homes has risen substantially enough to help qualify for a refinance, even if they were denied in the past.

Housing remains one of the most important investment decisions that most people make in their lifetimes. The questions of what to buy, when, for how much, and when to refinance all enter into the equation.

When looking at the question of whether to refinance, work with a broker that you know and trust. Use common sense. Ask questions, and make sure you get answers to the questions asked before you commit to anything.