Ghosts, Goblins and Mortgage Reports – Scary Stuff
I was cleaning off my desk at home and found last month's SmartWatch Report from ditech.com, aka GMAC Mortgage. A couple of years ago they started sending out these reports about once a quarter or so summarizing the loan and presenting various refinance options.
According to the report, I could do the following (some numbers changed to protect the innocent):
Cash out refinance – Get up to $xxx,xxx, roughly double my payment with a rate 3/8th of a percent higher than what I’ve got now. Probably an ok deal if I was desperate for cash.
Cash out at the same payment – Get $x,xxx for the same payment. Also at the slightly higher rate, a new 30-year loan adds seven years of payments to what I’ve got now. Their note says this “may not make sense for you now.” No kidding.
Home Equity Loan – GMAC no longer offers home equity loans. Curious that they’d let me do a big cash-out refi, but not a home equity loan.
Lower my monthly payment – now we’re talkin’!
Refi with a new 30 year loan – Save $57 a month. Wow. That adds seven years to the loan duration costing me over $70k+ more than my current loan over the life of the loan. Good deal – not. I could brown bag lunch twice a week and save more.
Refi with a new 15 year loan – The rate would be the same as my present rate. Payment would go up by $360-ish. Savings over the life of the loan estimated at over $75k.
These options and some other information are nicely laid out on a fold-out report. I’m glad they warned about the option that ‘might not be right.’ But they missed one that should have had a warning.
Take a look at the 15-year refinance option. It was for the same interest rate as my current loan. If I wanted to shift to a 15-year (or 12 or 20 or anything shorter than current) payoff, all I need to do is run the calculation in Excel and start adding additional principle to my payments. No need to refinance, no need to pay points, appraisal, closing, etc.
If the 15-year rate was lower than what I’m paying now, a refi might, emphasis might, make sense. But at the same rate, all I’d be doing is giving GMAC points and fees for something I can already do. I’d also be locking myself in to the higher payment. By doing nothing, I can start paying on a faster amortization schedule anytime I want. If things get tight, I can ease back to the current lower payment with no worries. In this case, the 15-year refinance option offers no advantage to me at all. Not making a note of that kind of takes the ‘smart’ out of ‘SmartWatch.’
The moral of the story - pay close attention to those ‘good deals.’ They’re almost always a good deal for whoever offers it, not always such a good deal on your side. In this case, saving $75K over the life of a loan might be a very smart thing to do. Saving $75K without paying a couple $K of fees up front would be even smarter.