I received a call last week from a fellow who asked about refinancing a property he owns in Aspen, Colo. He has a 6.75 percent rate with a balance of $350,000. He went to his bank, which told him that because the property is considered a “condo hotel,” it is not eligible for conventional financing.
Aside from the fact that I’m not licensed to do business in Colorado, I would have had the same problem refinancing the loan because of the type of property. I do like to think outside the box, however, so I asked him about his primary residence.
His Northern Virginia property is worth close to $800,000, and his mortgage balance is just $56,000. He carries a fixed rate of 5.50 percent and told me he is making extra principal payments of $1,000 per month, which will enable him to own his home free and clear in less than three years.
This fellow, who, over the course of our conversation, told me he is a certified public accountant and holds a master’s degree in business administration, clearly was quite happy that his mortgage would be paid off in three years.
What’s wrong with this picture?
While it is, indeed, admirable to pay off a mortgage and have the discipline to make extra payments to accelerate the payoff, this fellow is making a very poor choice by doing so.
Because the Colorado property is and will continue to be difficult to finance, I suggested that he refinance his primary residence in the amount of $406,000, using the funds to pay off the $56,000 mortgage and the $350,000 Colorado mortgage. With no points or fees, I quoted him a rate of 5.125 amortized over 30 years.
This would greatly reduce his interest costs and allow him to make extra payments. It’s a no-brainer. I was taken aback when he told me he wasn’t interested in such an arrangement because he didn’t like the idea of adding $350,000 of mortgage debt to his primary residence.
I asked him if he thought there was a chance he might default on the Colorado mortgage. Absolutely not, he said. He and his wife make lots of money, have perfect credit and have no plans to sell the Colorado condo.
I explained that mortgage debt is mortgage debt. It doesn’t know or care what property is secured as collateral.
He has two loans, one in the amount of $350,000 at 6.75 percent, the other in the amount of $56,000 at 5.50 percent. Consolidating these loans to one $406,000 loan secured to his primary residence with a rate of 5.125 percent would save him a considerable amount of money in interest and therefore enable him to pay off the debt more quickly.
He told me he understood what I was telling him. Still, he didn’t want to put an additional $400,000 on his primary residence. It was an odd conversation. It was clear that a man who is a CPA and has an MBA was willing to make a poor financial decision solely on the basis of what appears to be emotion.
Don’t let emotions keep you from making sound financial decisions, folks. This fellow is going to pay thousands more over the life of his loan because he is allowing his emotions, not simple arithmetic, to make this financial decision.
Send e-mail to henrysavage@pmcmortgage.com.
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