Is 3.625% < 5.125%? (Part 2)

I Must Protect Myself from Me

In part 1 of my refinance saga I noted that by refinancing I was going to save $545.00 per month on my mortgage payment and that it only made sense to refinance from 5.125% to 3.625% if I had the discipline to use my new found riches the right way. To re-cap, had I stayed with my original mortgage and payment in five years I would owe $62,691. With my new mortgage and payment after five years I’d now owe $93,506.

Typically I get a 10-15 responses/questions after I send my bi-monthly E-Note. Within a day of sending Part 1 my friend H. Peter (Like Bono of U2 he uses a short moniker) sent me an e-mail that said:

“Michael, over the 5 years you saved $545 / month or $32,700 to use on trips to France, high- quality bikes, and cool music downloads.”

For those of you who don’t know me well – H. Peter does – it is exactly his line of thinking I must protect myself against. I must have the discipline to protect me from myself so that the refinance becomes the correct move.

The key will be to save the $545 monthly ($6,540 annually). If I put the money under my mattress, after 5 years I will have $32,700 which, if I took that lump sum and paid down my mortgage, I would have a mortgage balance of $60,806. This would mean my refinancing made sense.

I plan to put the money into my Schwab account (a mix of stocks and bonds). Over that 5-year period with compound interest the money could be worth $37,945 (a 5% return); $39,070 (6% return); $40,243 (7% return) or zero if the market goes to hell in a hand basket. I’ll take my chances as money under a mattress loses money due to inflation.

I will monitor that account and if I’m doing better than planned annually I may use it for “France, cool bikes and music.” But that will take discipline.

When I coached high school basketball I would often tell players – in my attempt to prepare them for life, not basketball – that “It’s easy to do the things you like to do. What will separate you from others is if you can do the things you don’t like to do, and do them well.” I think that’s one definition of discipline.

In looking back it is ironic that I own the Vail condo because I bought a duplex in Bay View many years ago. I bought the duplex because I did not have financial (I did have athletic) discipline. I kept that duplex for 10 years and when I sold it I had $60,000 I would not have had if I had not purchased the home. I used that money as a down payment for the Vail condominium.

This lack of discipline – and I think many people lack financial discipline – is one of the reasons I encourage young people to buy a home. Your home becomes a forced savings account (building equity) while also providing a place to live.

I offer this note for those considering refinancing. Refinancing, like a home purchase, should be based on information – not emotion. If you refinance or if you purchase a home it should be refinanced or purchased by you – not sold to you. There is a difference. That’s where Homebuyer Associates comes in.

If you found this information of interest please share it with a friend. If you are a past client, thanks. If I can be of assistance to you, your family or friends I would welcome the referral. As always, if you have a real estate related question (including rehab) feel free to contact me.