Thursday, December 28, 2006

Stupid people rush to refinance now, per Washington Post

This Washington Post article talks about "good" reasons to refinance now. How "good" are those reasons? Not very.
  1. "You have an adjustable-rate mortgage that's scheduled to reset into higher payments in the six months ahead. Your loan might be a payment-option mortgage, an interest-only mortgage originated in 2003 or 2004 with a three-year reset, or simply an adjustable tied to short-term Treasury rates that's already costing you more than the fixed-rate alternatives.
  2. You have a "piggyback" first-and-second mortgage package that was originally intended to let you purchase your house with a minimal or zero down payment while avoiding mortgage insurance premiums. But now the floating-rate second is above 8 percent and you want to bail.
  3. You need cash for a home improvement, a business investment or a vacation home now available at a bargain price. Even though the fixed rate on your first is below 6 percent, the opportunity to cash out thousands of dollars and refinance into a larger replacement mortgage is compelling, even if the rate is a little higher."
The problem here is that all these options presume you're a sucker:
1. You're refinancing because you took an earlier bet on adjustable-rate mortgages. Good for you, but you shouldn't have one in the first place. All three of the options listed are flat-out stupid as snake socks, for reasons that should be obvious.

2. You're not stupid for avoiding PMI; that's a legitimate option. However, getting the second mortgage as a floating rate was dumb as a sack of broken hammers. We already know you didn't have the money to just get a single mortgage with a decent downpayment, which means you don't have flexibility to have rates rise on you, but you went ahead and got the 2nd mortgage as a floater anyway.

3. Wow. I can't even begin on how wrong this entry is. Unless the home improvement is actually necessary home repairs, all three of these are just pointless exercises in wasting equity and chaining yourself to a bigger mortgage.

Makes me glad I've got money in REIT funds, to get money from the people taking money from stupid people.


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