The Wall Street Journal ran a big story on Wednesday about how homeowners are missing out on big savings because people can’t qualify for mortgage refinancings. This sounds like a tragic twist in what has been a humdinger of a bear housing market. But the more you understand mortgages, the more this bad news looks to be a blessing in disguise. To wit, the way fixed-rate mortgages are structured the lion’s share of your first decade’s payments are for interest payments, not to build home equity. Each time you refinance you reset the clock to zero, starting the interest-heavy period all over again. With the average homeowner mortgage lasting well less than 10 years before it is refinanced or paid off, it’s no wonder Americans are so lacking in home equity. I don’t mean to be insensitive to financially troubled homeowners who desperately need a break in their monthly payments, I’m just pointing out that there’s a big hidden cost to refinancing.
If you’ve read anything about business in the last couple of months, and I’ll work under the assumption that almost all the readers of this blog have to avoid repeating all the sordid details, you know about the subprime mess. The basic story line goes like this: Irresponsible and unscrupulous bankers offered borrowers loans at [...]
