No, but neither can I tell you that it is a good deal. I don’t know enough to
make this call. Neither do you. But what I do know makes me extremely skeptical.
You are not paying anything out of pocket because they are adding upfront costs
to the balance. I know this because if the balance of the new loan was the same
as the balance of the old one, the payment should decline by $258 rather than
$245. The smaller payment difference indicates that the new loan balance is
approximately $4500 more than your current balance.
In other words, you are paying $4500 for the lower rate. The fact that you
are borrowing the $4500 rather than paying it out of pocket does not change
this at all.
While this deal is not quite as good as it looks at first glance, it isn’t
a loser. My refinance calculator indicates that you come out ahead if you retain
the new mortgage more than 42 months. But does coming out ahead make it a "good
deal"?
You define it that way, which is exactly how the solicitor wants you to define
it. Probably he paid good money to buy a list of mortgage borrowers with large
balances and interest rates above 7%. This is a valuable list precisely because
it is easy to demonstrate significant savings to the client, and make a substantial
profit at the same time. If the applicant is focused solely on the monthly payment,
you can make even more by rolling upfront fees into the balance.
The problem with defining a "good deal" in terms of the savings from
a refinance is that such savings depend on the rate on the old loan as well
as the rate and upfront charges being offered on the new one. By this definition,
if your old loan had a rate of 8.75%, the deal offered would be even better!
This makes no sense. Your focus should be on whether or not you could do better
dealing elsewhere.
A "good deal" is a new loan that is priced as well or better than
any other new loan that you can find in the current market. This is the
same definition you would use if you were shopping for an automobile, a computer
or a mousetrap.
Using this definition, I don’t know whether your deal is a good one or not.
I don’t know your credit score, how much equity you have in your property, whether
it is your permanent residence, or what type of property it is. All these factors
and more are relevant to what you could find in the marketplace if you shopped
other loan providers. Until you do, you don’t know whether you have a good deal,
either.
February 18, 2003
