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Sun, Jun

‘Pre-Approved’ - A Post-COVID Mortgage Refi Might be Too Good to Be True

VOICES-Judging by the multiple offers all of us are now receiving every week in the mail to refinance our homes at supposedly lower rates, we'd be fools if we didn't. . .or would we be fools if we did? 

One typical offer I just received said I was "Pre-Approved. . .due to my excellent mortgage payment history and credit score." It quoted me a fixed interest rate of 2.25% (3.152 APR) and a new monthly payment of $1258 as opposed to my present rate of 3.49% and a monthly payment of $1793.95 on a mortgage balance of approximately $327,424. 

By this point, the mortgage refi company is hoping that I would just go for their new 30-year mortgage without doing some simple math. Don't be suckered: Do the math. 

Multiply their $1258 times 12 to get what I would pay over a year. And then, multiply that figure by 30 to see the total amount I would pay over 30 years and you get $452,880, which I would say is considerably higher than my present home mortgage balance of $327,424.28. 

Why is this so? Because virtually all fixed-rate mortgages start off with high monthly interest repayments and low monthly principal repayment in the beginning years of all home mortgages, so that you initially pay down little of the principal, while paying most of the interest off long before the principal is finally fully paid down at 30 years. 

COVID-19 has only made it more tempting for too many people on the verge of losing their homes to get these mortgages in a desperate attempt to lower their monthly nut until things turn around in this country. Some people who own apartment buildings have also told me they need higher interest deductions on their taxes to offset income and lower taxes. That being said, I still believe these loans are problematic, to say the least.

 

(Leonard Isenberg is a Los Angeles, observer, and a contributor to CityWatch. He was a second- generation teacher at LAUSD and blogs at perdaily.com. Leonard can be reached at Lenny@perdaily.com.) Illustration: Chris Gash. Edited for CityWatch by Linda Abrams.