When to refinance? My latest thoughts.

Posted By Paul

It wasn't that long ago that I refinanced my mortgage and I remember that as we signed the papers the agent actually said: "Let's take a moment to appreciate how good a rate this is, it will never get much better than this."

Now I see that rates have dropped to the point where I am once again considering refinancing.

There are so many sources of advice on this topic everything from: "Only refinance if you can save at least one point on your rate." to complicated spreadsheets and formulas.

Well when I found myself trying to decide if I should refinance again, I realized that what I was really doing was deciding two things:

1) What was my primary goal?
2) What was I willing to commit to?

If you can answer these two questions then I think refinancing decisions become much more clear.

Here is what it was in my case:

What was my primary goal?
There are lots of perfectly valid answers to this question when it comes to refinancing.  Some of the most common are:
"I want to pay off my mortgage as fast as possible."
A great goal.  Once your mortgage is paid off then a huge monthly expense essentially disappears from your life.

"I want to pay as little in interest as possible."
This one often goes with the "fast as possible" one since the two often relate.  It's annoying paying all of this interest month after month.

"I want my monthly payment to be as little as possible."
Another perfectly valid choice.  A smaller payment can mean peace of mind.  Less money you have to come up with every month.

What was I willing to commit to?
Here are some things that might come up when you consider this question:

"Can I commit to paying the closing costs?"
Another simple one.  If you don't want to pay the money for the closing costs, then it simplifies your hunt considerably in that its becomes a question of the best rate you can get with zero closing.

"Can I commit to a bigger payment?"
If you refinance to a shorter mortgage (go from 30 year to 15 year) then not only do you get a better rate, but it generally means paying off quicker and less interest paid.  The problem?  It often means your monthly payment gets bigger (unless your rate increase is significant enough to offset it).  Ask yourself if you are willing to commit to being obligated to make that payment every month.

"Can I commit to being in this house for a certain period of time?"
If you are CERTAIN that you are going to move in a specified time, or if you are CERTAIN that you aren't then your choices become a little more clear.  For example, probably not much point in refinancing a house if you're going to move in a year anyway.

For me I found that my primary goal was to lower my monthly payment.  Even if it means I have to pay it longer and I end up paying more interest in the long run.  I also realized that I didn't want to commit to a bigger payment, and that even though I wasn't 100% sure that I wasn't going to move anytime soon, that I was at least able to commit to the idea that a move was not in my foreseeable future.   I was also able to commit to paying the closing costs.

Once I figured that out, the refi choices became much more clear.  For me I just did a straight refi to a 30 year fixed, and took the better rate.  Of course my payment drops thanks to the lower rate and "resetting the clock" on the 30 year mortgage, but it also means that the amount going to principal per payment drops.

In this process I did discover something interesting.  When I took the amount I paid in principal before the refi, and looked up how long it would take to reach that same amount of principal AFTER the refi if I just paid the minimum each month, the answer was that it would take me about 6 years.  Wow.

I also discovered that if I did the refi and took the lower payment but kept paying the amount of my OLD payment (applying the extra to the principal) then the total principal I would pay each month is more than the total principal I pay each month right now.  My thought is that I can keep doing that, but if something catastrophic happens where money gets really tight then I can just stop paying that extra and fall back to my nice small payment.

So I decided to go for it, so I am working on the refinance right now.  I know lots of people try to approach this problem purely mathematically, but I find that difficult to do since often there are just too many unknowns for me.  By focusing on two simple questions I felt like I was able to identify the choice that got me to my goals given the best information I had right now.

My Adventure In Personal Lending

Posted By Paul

Hi Everyone,

How, I found this very old posting about personal lending just sitting in my drafts folder.

I'm posting it now even though I wrote this about 18 months ago.

So stay tuned for the epilogue on how it went.

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I recently learned a little about personal lending sites. They had me intrigued to the point where I decided to dip my toe in the world of personal lending.

I decided to open an account at Prosper.com and see what it was like lending money to random people.

First of all, it seemed very strange to be browsing listings of total strangers. There was a voyeuristic quality of perusing the loan listings of these people. It was fascinating to see how much money they needed and why (not to mention the interest rate they were willing to pay).

Since I was very new to this whole concept I decided to choose three different loans and loan each $25. The way these pages work is that a person who wants a loan asks for a certain amount, for a certain payback term with a certain interest rate. If the loan looks good you can contribute to the loan.

I chose two loans that were considered lower risk by prosper (with a correspondingly lower interest rate) and one high risk loan (with an interest rate of 31%). All three loans have a 3 year term.

It is kind of cool that you can just contribute $25 to a loan, so the total you need to play around is actually very small. The idea is that if someone wants to borrow $1000 they need to have enough lenders willing to contribute to their loan so that they reach their goal.

There are many strange aspects of this process. Some of the obvious ones:

-I don't honestly know if these people are using the money for what they say they are using it for (the listing says 'to payoff a credit card' but for all I know it could be going to a gambling habit)

-There is the risk that one (or more) of your borrowers will stop paying/declare bankruptcy/move off the grid, or who knows what.

My overall impression of personal lending? When I loaned out the money and every month when I get my payments (so far all three loans are being paid off on schedule) I feel like I'm playing some sort of game. I know that any form of investment can be viewed as gambling, but lending money to strangers using their internet posts to judge the likelihood of being paid back REALLY feels like gambling.

So for me, I think personal lending will just be a fun little hobby. Picking loans and watching the payments come in IS fun, but I don't think I will ever put anything more than "fun money" into one of these sites.

For some of the loans I contributed to I saw people that had made contributions in excess of $1500! I really don't see myself ever doing that. There seems to be so much uncertainty in the process that I would feel uncomfortable committing any significant amount of money to it.