By David Henderson
I’m in the midst of a refinance of my mortgage, a very straightforward one because our equity in the house is over 80 percent of even a low-ball estimate of value. I was talking to the bank representative early in the process and she said, “So your monthly payment will be down from the current $1339 to $720.”
I pointed out matter-of-factly that, of course, that large difference between those two amounts is due mainly to the fact that we would be taking on a 15-year mortgage rather than sticking with our original 15-year mortgage that has only about 10 years left on it. The best way to compare, I said, is to look at the saving in interest. I had in mind the 1.25-percentage-point difference between the old 5.5 percent and the new 4.25 percent. On a mortgage of about $100K, that’s $1250 a year. When you take account of the tax treatment of interest, it still saves us, net of tax, about $800 a year.
Then she surprised me. “No,” she said, “you might not pay less interest. You might pay more because you’re paying interest for 5 more years.”
I don’t think she was playing to what she thought was my ignorance of basic finance, interest, and present value. She knows I’m an economics professor. I think it’s that she didn’t get it.
The incident reminded me of my “Buyer Beware Consumer Reports” that I appended to the article on Interest in the first edition of the Concise Encyclopedia.