The world of finance can be intimidating for some people and there are definitely some valid reasons. Investing money comes with the risk of loss, applying for a loan comes with the chance of denial, and mortgage underwriting can seem like a long uphill climb. It’s no secret that borrowing money comes with a cost you should consider beforehand. Each of these examples might send a cold wave of anxiety rolling through you, but if you actually take time to analyze your situation and work with someone qualified to guide you, there’s really not much to fear.
Today, I’d like to focus on the fear attached to the cost of borrowing money. The costs of doing a loan on an average home in our area here in Prairie Village and the rest of Johnson County is about $2,000-$2,500. For homebuyers these costs are not necessarily perceived as demotivating compared to people refinancing their existing home. Why? Mostly because buyers are excited by the prospect of getting into a new home whereas a homeowner refinancing already owns the home, meaning the excitement is missing somewhat. Homebuyers also have options to pay borrowing costs as it’s possible for a seller to pay them or for the lender to pay them on behalf of a buyer.
So what about borrowers who might benefit from refinancing but don’t due to fear? The solution involves time and patience, something increasingly hard to ask for in today’s world of instant answers and gratification. There is, however, a methodology I use to help analyze a borrower’s situation to determine the exact benefits to their situation, and here’s an example. Most borrowers who choose not to refinance do so because the costs added to the loan reduce their equity in the home.
What’s interesting to think about is that the equity which exists can be considered somewhat fictitious. To access that equity by cashing in on their real estate investment a homeowner needs to sell the home. This normally isn’t in the borrower’s immediate future, but it may be an option somewhere in the next 5-10 years. What will home values do during the next five to 10 years? What condition will their house be in when it’s time to sell compared to others on the market? What will the housing inventory be like at that point? By asking these questions which require thought of the unknown (the future) it’s easy to see how financial fear can be broken down.
To illustrate the mathematics, let’s consider a borrower with a $200,000 existing loan who has the opportunity to reduce their rate by 0.5 percent. This seemingly slight rate reduction, even when adding the costs of the balance to a new refinance, results in a guaranteed payment reduction of 4.7 percent every month. To summarize, reducing equity (by $,2000) is somewhat fictitious until the house sells in 5-10 years. It will also sell at an unknown future price in an unknown future market, so what prevents borrowers from being able to benefit from a guaranteed rate of return (near 5 percent) in this example?
Fear often derails the mind from being able to see the forest through the trees. Everyone’s situation is different, so it’s important to take the time to analyze everything properly. Not all loan officers and lending companies are created equal, so you want to make sure you work with someone adept at approaching financial situations analytically. Most of all, don’t let fear motivate you in this time of historically low rates. Giving into those feelings may cause you to miss some great financial opportunities!
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268