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Tuesday, September 19, 2006
Roger Schlesinger :: Townhall.com Columnist
How good is this?
by Roger Schlesinger
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The title to a text is designed to catch your attention and get you to read the article. I had a much better title in mind but I was afraid "Free Money" would elicit too many responses that are unfit to print so I stuck with what I have come up with: "How Good is This". I must admit that "Free Money" is a much flashier title, and after all, that is what I am going to talk about, but this way I eliminate a lot of skeptics right from the start.

Is there such a thing as free money? I believe there is. There is also "almost free money" that exists in the mortgage industry, or others may say partial free money.

Then there are those who will read this and simply say it is all B.S. The only thing I can say is to use your own definition and come up with your own conclusions. In my opinion, if you have a long-term debt(s) and a fixed payment on said debt and you can refinance to a shorter term and take some cash out of the property, it could happen under the following circumstances. If your new payment is lower than your old payment and you pay it back quicker, then what did you pay for the cash? Nothing!

Example #1:

30 year fixed @7.5% (Believe it or not many of these exist)

Original Balance of $240,000,with a payment of $1,678/mo.

Current balance after 6 years $224,000

HELOC @ 8.75% $100,000, 30-year interest only payment of $729/mo.

Balance after 1 year $100,000

Total monthly payment $2,407 on $324,000 balance.

20 year fixed @6.00% on $336,000 has a payment of $2,407/mo.

The borrower who does this gets approximately $13,000 and doesn't increase his payment, retires his debt 4 years earlier than the first, and earlier than the HELOC because the HELOC isn't being amortized. It is being paid interest only. If you paid the HELOC at a 20 year amortization, your payment would go up $93 a month which would allow the borrower to take a larger loan, $349,000, keep the payment the same, and still pay zero for the now $26,000 cash out, because he still finishes 4 years ahead of the 30 year first mortgage.

Different interest rates will yield different results.

I can come up with hundreds of scenarios that will demonstrate my point, but it isn't the area I wish to really demonstrate. The area I want to concentrate on is the one where credit cards are plentiful. The results are staggering and can really make a difference in your life. Continued...
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About The Author

Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.

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(2 comments so Far)
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Reply # 1
Date: Sep 19, 2006 - 10:14 AM EST
Thats all good...
But what about first-time home buyers in one of the most expensive housing markets? A cheap house in my area is $300,000.

Those mortgate and interest reduction games works fine for those who own a home, but the rest of us have to save up the cash the good old fashioned way.

Good article nevertheless.
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Reply # 2
Date: Sep 19, 2006 - 1:47 PM EST
There's a simpler way
The problem I have with this article is that one never KNOWS what the mortgage rate will be in 6 years. People who tried that in 1973 would have been dealing with 14% or so in 1979.

Like anything else in life, it's a gamble.

The easier plan is to take the fixed mortgage, then pay an extra $50 or $100 a month against the principal. It adds up quickly. The scheme was presented about 25 years ago in a handyman magazine and in the example used, paying an extra $50 a month (real money then!) saved 10 years and on the order of 1/4 of the total mortgaged amount (principal + interest). Most mortgages do not have a pre-pay penalty.
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