Michigan Mortgage

The Free Market Erases Real Estate Losses Almost Effortlessly

by Evan Vanderwey on 20/08/10 at 10:08 am

I’ve had no fewer than 10 conversations this week where the title of this post was at least partially true for the client. I’ll demonstrate what I mean here by running the numbers for a client I met this summer through my connection with The Dave Ramsey Radio Program.

Five years ago he paid just over $450,000 for his home. Over the next two years it went up in value to around $500,000 based on similar home sales in his neighborhood. Three years later—we just received the appraisal this week—the home was valued at $350,000. This is a depressing fact if you look at it all by itself.

But we don’t have to look at the value all by itself. We can take another angle.

Let’s break down the numbers on this refinance: This client still owes $333,000 to the mortgage company as a result of having paid $2040 per month for almost five years. His rate was 5.5% during that entire time, and his loan was a 30-year fixed-rate loan.

After completing the refinance, he’ll have a 15-year fixed-rate loan near 4%, and their payment will be $2480 per month. This is $440 more than it was before, but he can handle the increase.

How much will he save? A little simple math will tell us.

Their payment went up $440 per month for 180 months (15 years).  That means this new mortgage will cost them $79,200 more over the next 15 years.

But don’t forget, that the new loan is 10 years shorter than the old one. That’s 15 years rather than the 25 years remaining – exactly 120 payments of $2040 that he will not have to make. He’ll save $244,800.

So while his home went down in value by around $150,000, the net savings as a result of this refinance is $165,000 (245k – 80k).

But here’s the main point:

Why was he able to save that much money? The reason is most closely tied to the fact that their home (and over 100 million others) went down in value by more than 25%.

You see, you don’t get one without the other.  If the housing market hadn’t tanked, then you would not have had the very low rates. Sure, rates might have come back down to 5.5% under a mild recession, maybe even 5.25%, but that would not have been enough to entice this customer to refinance.  It took a really big drop in the housing market for the rates to come down this much.

So one refinance can erase 3 years of market decline.

Remember, when the free market closes a door, it usually opens a few windows.

Michigan mortgage company

Related posts:

1. Seven ways to look this bad real-estate and economic market straight in the face and do something very positive.
2. BUY NOW! Part IV – Supply and Demand & Real Estate Investors