IT'S THE GREAT PUMPKIN CHARLIE BROWN!

Dear Future Millionaire,

It's the day before Halloween and Linus is writing a letter to the Great Pumpkin. All the while his sister Lucy is berating him about how insane it is to believe in the Great Pumpkin. Not to mention write to him. “How you gonna mail that letter anyway?” she says. The next day he talks Sally (Charlie Brown's sister) into missing out on Trick or Treating and the Halloween party to sit in the pumpkin patch and wait for the Great Pumpkin. A figure that will fly through the air and bring toys to all the girls and boys.

Well as you know the Great Pumpkin never shows up and Sally is so upset. She has defended Linus to their friends risking her reputation. Missing trick or treating and the Halloween Party. All the while Linus is convinced that the Great Pumpkin will appear because his pumpkin patch is the most sincere. Still no Great pumpkin. Refinancing your mortgage is a lot like waiting for the Great Pumpkin.

The promise of monthly savings and a bigger bank account. Then reality sets in. “Hmmm...Our mortgage balance is higher than before and our bank account is smaller. Did we make a mistake?” Let me say for the record most refinances are a mistake.

To make a refinancing work you need two full percentage points difference. Most borrowers are shocked by this but that's only because they didn't do the math. The fees alone are typically two years of what ever they saved on the monthly payment. The worst part is starting the 30 year clock over again.

I know an extra 100 or 200 dollars a month is a blessing to the budget, but what's the real cost? Maybe the problem is not the mortgage. Maybe the problem is the personal spending or a lack of income. Remember this...The generation that retired before us had their houses paid off when they retired. It is biggest reason the majority of the WW2 generation retired well.

The second biggest reason that refinancing your mortgage is usually a mistake, is the lack of principal pay down. It takes five years of payments before there is any significant principal pay down in your new mortgage. I rarely see someone refinancing into a 15 year mortgage. And I never see anyone continue to make the same payment as they did before they refinanced. I agree that using the lower rate to accelerate the principal pay down makes a lot of sense. But I never see it. The supposedly huge savings from the refinancing evaporates and all that is left is a larger mortgage balance and an extra five years of payments.

Now I am not against refinancing a mortgage when it makes economic sense and increases your net worth. If you can get a two percent reduction in your interest rate. Great do it! Sometimes... there are other economic advantages. I recently did a refinance where the mortgage was covering two properties. We were able to get a new mortgage to cover one property. Making the second property free and clear. A tremendous net worth boost.

You may not have a mortgage but I know you have these discussions. Your friends and relatives look to you for advice and recommendations. I only ask that when the subject comes up that you encourage them to do the math. Even encouraging them to eat at home two extra nights a month and use those funds to pay down principal. They could save 7 years of payments on the average mortgage. What a blessing!

Encourage them to do the math before they refinance. It will keep them from refinancing the pumpkin patch waiting and hoping in vane for the Great Pumpkin to appear.

At the end of the story Charlie Brown tries to console Linus by saying that he did a lot of stupid things too. Linus turns red and says “Stupid what do you mean Stupid?...Just wait till next year. You'll see! The Great pumpkin will appear and I will be waiting for him!”

Likewise the refi-advertising continues.

Thank you very much for your continued support and confidence!

Yours Truly,

Steve

PS. For those that don't do this every day the math can be hard. Feel free to have your friends and relatives call me. I would be happy to do the math for them...Thank you...Steve

Steven K. Woodard Sr.

Financial Planner

Morganwood Ltd.

1578 S. Kihei Road

Kihei, HI 96753

Office 808-875-9887

Direct 808-298-4647