Beware Tempting Mortgage Refinance Offers

Earlier this year I received a nice letter from QuickenLoans that said:

“You may be eligible to refinance your home loan at a low, 30-year fixed interest rate of 3.75% (4.609% APR). This lower rate could reduce your monthly mortage payment to $467.02!”  (Bold print theirs)

They repeat this message two additional times on the same page, once in regular type and immediately below in bold in a call out box

Sound good?  Not so fast.

I refinanced about 5 years ago to a 15 year fixed conventional loan at 3.375% with a monthly payment of approximately $916.  This new loan would basically cut my monthly payment in half!  But…

When I received this offer I had a little less than 11 years left on my current loan.   This new loan would add 20 years to the length of my loan.  It would also increase my interest rate by 0.375%.  Let’s just do some quick uncomplicated math here:

12 months x 30 years x $467 = 168,120 (remember I would be refinancing only $100,842)

12 months x 11 years x $916 = 120,912

That’s a $47,000 difference!  For the privilege of cutting my monthly payment in half, I get to increase my interest rate, add 20 years to my payment term, and shell out an additional $47,000 in interest.

Don’t forget that I am in the 5th year of my current 15-year loan, so by now, the way amortization schedules work, I am paying considerably more in principal than I am in interest (out of my $916/month payment less than $300 is interest and over $600 is paying down principal).  This is good.

If I refinance now at the offer QuickenLoans presented to me I would be paying considerably more in interest than I would against principal (out of the $467/month payment over $300 is interest at the start and only about $150 is paying down principal).  This is bad.

Anyone still think this offer is a good deal for me?  Or that this lender is really looking out for my best interest?

Remember this simple concept:  When the interest portion of your payment is higher than the principal portion, your loan is in the lender’s favor, not yours.  (Tweet)

The best part of this?  They are offering an FHA loan for which my condo unit doesn’t even qualify.  So they would likely try to sell me an even higher interest rate after going through the whole process, and I would end up with an even worse deal.

Beware the tempting offer.  Do the math.  Talk it over with someone you trust will give you the straight figures.