This is a real head scratcher.
A few weeks ago I got an envelope in the mail from Wells Fargo. They happen to hold our home mortgage, so I always open up whatever they send me despite the fact a majority of the time they are trying to sign me up for a credit card or some other product.
This time was a little different…
The Odd Refinance Offer From My Mortgage Company
I opened up the envelope and on nice Wells Fargo letterhead was a refinance offer.
I’m thinking, “I know, I know, you want to offer me a lower rate, extend the length of my loan, get a new origination fee paid, yadda yadda yadda…”
Except that wasn’t the case at all.
In the middle of the page were two columns: one for my current mortgage and the second for the refinancing offer.
They provided a step by step comparison of the offer.
Here’s what it looked like:
- Term: 15 years / 15 years
- Loan Amount: current mortgage balance / current mortgage balance
- Interest rate: our current interest rate / a higher interest rate
- Amount saved per month: $0 / $182
- Interest savings: None
What the?
They sent me a refinance offer for a higher interest rate that would somehow save me money on my monthly payment but not save me any interest over the life of the loan. (In fact if I crunched the numbers I would guess the refinance would be more expensive, but I haven’t confirmed that yet.)
How does this work? How could they possible be saving me money each month while increasing my interest rate?
The Oldest Mortgage Trick in the Book
This stuff happens all the time. You heard it on radio and television commercials, and it is in web advertisements all the time. “Lower your monthly payment when you refinance!”
Yes, they can lower my monthly payment. Why? Because my mortgage balance is lower than when I first got the loan three years ago. We’ve made payments that have knocked down the principal amount plus included extra money each month in order to pay the loan down faster.
These aren’t the actual numbers, but let’s just say my original loan was for $200,000 and we have paid it down to $160,000. The refinance amount isn’t for $200,000… it’s for $160,000. So of course the loan amount is going to “save me money” on my monthly payment. There’s $40,000 that isn’t being refinanced at the higher rate.
Many people fall for this trick with home and car loans. They’ll refinance and extend the term leaving them trapped in debt that much longer. They’ll buy the “we can refinance your home, save you money, and get you some cash to buy a new TV!”
What I’m Most Shocked About
I’m not shocked they sent me a refi offer even at a higher interest rate.
What I am most shocked about is they admitted it wouldn’t save me any interest in the long run.
Cutting the monthly payment down is great, but if the overall interest costs are higher I would be losing out.
Who knew banks could be so honest?
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