Two Ways of Looking at a Refi

Squirrel considers her options

‘Refinance’ means different things depending on whom you talk to. There are two very different philosophies of home ownership and debt structuring. One leads in a surprising direction toward financial independence, and the other down the primrose path to, well, the primrose path never leads anywhere good. If you think you might ever refinance your home loan, take a moment to consider these two different strategies.

As a disclaimer, I’ve never refinanced a mortgage because I don’t own a house, never have, and possibly never will. That’s because I’m highly skeptical of conventional wisdom around these matters. Home ownership only makes sense if you know you’re going to own the house for at least five years, and that hasn’t been a viable option for me during my entire adult life. Not due to financial means, no, but rather to sound career strategy. My husband and I have done far better financially by being willing and able to change cities for job opportunities than we would have through appreciating real estate. This is why my opinion is interesting, because I don’t really have a dog in the fight. I look at real estate as a bystander.

I first learned the term ‘refi’ at age eighteen, working my first legit office job in a mortgage bank. The way it was explained to me, people would refinance to get a better interest rate, and that would mean they could save thousands of dollars in interest over the life of the loan. Whoa, good idea, I thought. My parents had only bought a house three years earlier, and I didn’t know much about that sort of thing. I assumed that refinancing meant you either made the same monthly payment and paid your mortgage off a little early, or that you paid a little less each month.

It never occurred to me that people would refinance their home loan as a way of dealing with their credit card debt, that they’d actually be willing to sign papers that made their house more expensive or extended their loan. Who would do that?? That didn’t even make sense. I didn’t have credit cards at that time, and wouldn’t for several years. My parents had only taken out a credit card to build credit history so they could qualify for a home loan. I had no idea that people - any people at all - were using consumer debt to finance lifestyle upgrades they couldn’t afford.

It turns out that’s the standard way to do it. Use your home equity as a cash machine. Roll your credit card debt into this new loan every so often. Maybe even take out a HELOC (home equity line of credit) so you can borrow against your security, your most important asset, the most expensive thing you’ve ever bought.

HUH?

I’ve seen this happen several times. Someone starts out with an enviably low home loan and then refinances a couple-few times over the years. Suddenly the mortgage is double, triple, even quadruple where it was when it started.

There’s another way to do it. It’s almost completely opposite the standard approach. That is to refinance for a lower interest rate, maybe even with HIGHER monthly payments, to shorten the length of the loan and pay it off as fast as possible. Race to the finish line.

*MIND BLOWN*

In the first, most common scenario, people are expanding their baseline lifestyles and expectations along with the supposed market value of their house. They progressively owe more and more while being less and less able to stomach even temporary cuts to what they have begun to see as necessities. On the hedonic treadmill, forever and always.

In the second scenario, the rare few are looking ahead to what Future Self would like. They’re pacing themselves, occasionally making short-term sacrifices for long-term stability and comfort. They progressively owe LESS AND LESS. They place more value in the feeling of being free, of one day owing nothing to anyone. They can look ahead to a specific year when they’ll own their home free and clear. They know when they’ll reach the crossover point, when the income from their investments equals their current expenses.

The “refinance to cover our debt” model has the Old Version of someone making higher mortgage payments to pay off the spending of the Young Version. Old Me has to work and work to pay extra because Young Me wanted to have more fun than I could afford.

The “maybe retire early” model has Young Me working hard to make things cheaper for Old Me. In this version, Old Me doesn’t have to worry quite as much about being crushed by medical expenses just as I’m too old and ill to keep working. It’s also possible that a hale and hearty Old Me can use the extra money as a windfall for travel, a home remodel, or whatever.

One major difference between the two is that the debt-rollercoaster version is default. It’s what happens with a lack of planning and foresight, and it’s also what happens when a couple has trouble negotiating with one another about money. The retire-early model absolutely requires both partners to come to terms with each other, to make agreements and keep them. You can only be that careful with large quantities of money over a decades-long time span if you have open channels of communication. In other words, it’s not for amateurs.

This is part of why my husband and I are living in a studio apartment, why we own neither a house nor a car. We both agree that it’s worthwhile to downsize temporarily. We both have very specific financial goals on a specific timeline. We figured that we could handle living in a confined space for a year or two, and that later in life it would make a good story. Shared adversity can make your relationship stronger. It’s something to laugh about later.

If we do ever buy a house, there are only a few circumstances in which I would think it was a good idea. 1. A ten-year or fifteen-year mortgage. 2. Buying a house with a granny unit, renting out the house, and living in the granny unit while our tenants pay off our mortgage. 3. Buying the house with cash and not carrying a mortgage at all. There are lots of ways to become home owners, and the standard-issue perpetual debt model is not the only way.