We just took advantage of the cheap cost of debt and refinanced our home. With the economy in a COVID triggered spiral, the federal reserve has taken unprecedented actions to prop up the financial markets, resulting in the lowest mortgage interest rates in history. Thinking about a refinance? Do you have any debt? How do you know if it pays to refinance?
The Math of our Refinance
The easiest way to know if it makes sense to refinance is to look at a loan amortization table with the details of your existing loan and the new loan side by side comparing the interest between the two. Typical closing costs will be 1.5-2% of the new loan. How many months of cheaper interest does it take to pay these closing costs? For the details of our loan, the refinance paid for itself in less than a year. Since we plan to stay in our house for a year and there is no obvious path to eliminate our mortgage before that time, this is a no brainer. Over the life of the loan, it will save a significant amount more than that. Here are some stats:
- 13 years – Time to get out of debt if we did not refinance.
- 12 years – Time to get out of debt with new loan (by continuing our previous payment).
- 1.4% – Interest rate reduction, enough avoided over the life of the loan to buy a new car!
- 1.3% – Closing costs for new loan (Payback <1 year)
Should you pay the minimum on your mortgage?
Interest rates are low. Shouldn’t we just make minimum payments, and invest the rest? In practice, those early payments that people talk about investing tend to be used on cars, vacations, and burritos. Our goal is not to have cheaper monthly payments. Our goal is to be obedient to the convictions the Lord places on our hearts. For us that means getting out of debt, the sooner the better. We want to purchase our freedom. To achieve this, we plan to maintain our previous payment, which already fits into our budget comfortably. By maintaining our previous payment, we will get out of debt a full year sooner than we would have if we did not refinance. As an added bonus, by always paying more than we need to, we have an option to lower our monthly bills if life circumstances change. One caveat is that we do not have higher interest debt. If we did, we would put any extra money toward paying that down first. To understand our unusual convictions, let’s start with a brief history of modern debt, and then explore what the Bible has to say on the topic.
What is Debt?
Have you ever wondered what would happen if lending was severely restricted or disappeared in our country? You have to look no further than our Southern neighbor, Mexico, to understand what life would be like. Credit is not readily available to many Mexicans the way we are used to. As a result, consumption of goods, even a pizza, requires cash. Many houses are in a perpetual state of construction as the owners slowly buy bricks over the years as they can afford them. Cars are kept longer and patched together to keep them running because who has enough cash to buy a new car? Medical procedures may require you to purchase your own supplies and even find blood donors ahead of your surgery as was the case for a family that close friends of ours in Mexico minister to. We in the United States are oblivious to how efficiently debt helps us operate as a society. It provides the poor with access to capital so that they can have similar opportunities to the rich in terms of education, medical care, housing, etc.
There was a time though when debt was not as readily available as it is today. Long ago, our cash could be taken to a bank and exchanged for gold or silver. Our entire currency was backed by metal, and there was relatively little debt. Like Mexico, if you wanted a pizza, you paid for it with cash. That had challenges because it put a limit on the amount of money available. Having limited cash is an especially bad situation to be in if you are a government reeling from the effects of the great depression and are employing lots of hungry people but you don’t have any gold to give them. Suppose you wanted to fight a war and needed weapons but you didn’t have any gold to buy them with? To remedy this, our country switched to federal reserve notes, the cash that you and I are familiar with. Technically, it is a “fiat currency” meaning it is not backed by anything but the government. Behind the scenes though, the federal reserve installed a system that used government debt to back the cash in place of gold. The saying is that the dollar is backed by “the full faith and CREDIT of the US government.” The word credit is often forgotten. Under the system they contrived, cash is nothing more than an instrument used to collateralize the government debt. In plain English, instead of cash being backed by gold sitting in a vault, the cash in your bank account is backed by government issued debt. If there was no government debt, there could be no cash. Try to wrap your mind around the implications of that. Next time you hear a politician lamenting deficits and talking about balanced budgets realize that they have no idea how the financial system works. The government actually can’t run a surplus very long without decreasing the money supply which is a very bad thing for the economy. There are economists who openly advocate perpetual budget deficits.
What does the Bible say about debt?
Some would argue that this grand invention of society coupled with capitalism has lifted more out of poverty than any other system on earth. The world absolutely and resolutely declares that debt is a good thing. But debt does not come without costs. This trick only works for rich nations. Poor nations are held hostage by it, sometimes forced to choose between feeding their citizens or exporting their food to pay loans as their citizens starve. Debt is a terrible form of modern slavery that engulfs entire nations. There is also a significant difference between our wealthy government and her own citizens. “We the people” cannot issue more money to pay for our debt. Once debt has a hold on us, we may never escape.
In this life, the bible calls debt in all its forms slavery. No debt is good debt. Ever. Period. Not house debt. Not education debt. Not car debt. Not small business debt. Not church debt. Especially not consumer (i.e. credit card) debt. There will be no debt in heaven except the debt of gratitude to the one who paid our sin debt. We won’t need a mortgage because we will be living in our Father’s house. Everyone in hell will suffer under the eternal weight of the debt of sin. The Bible urges Christians to owe nothing. It urges people caught in slavery to purchase their freedom if they are able. It warns us against becoming slaves. It is important to develop your own convictions under the direction of the Holy Spirit, but we suggest meditating on Proverbs 22:7, 1 Corinthians 7:21-23, and Romans 13:8 while developing your thinking on debt rather than just accepting what the world says. Our conviction is simple: debt is bad, avoid new debt whenever possible, and eliminate existing debt.
What about lending? Perhaps you have heard about micro lending in the 3rd world? Basically, social justice groups have taken the world ‘s model and added it to the church in an insidious way. This is just another example of the church embracing things the world calls good that are forbidden in scripture. To make capital available to a poor person in Africa that might want to start a charcoal business, a Christian in America might finance a micro loan for that individual so they could buy a radio to advertise. If the business is successful, the Christian gets their money back with interest. The problem is that this is in direct opposition to the Bible and the results are that it distracts from the gospel. Porter can testify to the damaging affects it can have. On a mission to Kenya, she was approached by people not the least interested in the gospel but asking for micro loans. At a very high level, the Bible says that charging interest while lending to your brother is forbidden and that you better watch out, because there is a defender of the fatherless watching and you will be held accountable for taking advantage of the poor. Not all lending is bad however. The Bible teaches that we can lend to the Lord. Christians are to meet needs of the poor through giving (Proverbs 19:17).
In light of scripture, shouldn’t we take drastic action to get rid of debt?
One might ask, if debt is so bad, shouldn’t we just sell our home and find an apartment or possibly a cheaper house? When we look at our life and the biblical principles around stewardship, we don’t feel called to do that right now. The theme of 1 Corinthians 7 is to remain in the state you were called. We have a home. The Bible doesn’t command everyone to go sell their homes to get out of debt rapidly. It just says to purchase your freedom if you are able and owe nothing to anyone. In our situation, we feel that we are able to be faithful stewards of His Money while purchasing our freedom. This again is an area where you should seek direction from the Lord and develop your own conviction.
Some might have to sell a house to be obedient. For example, if you are not able to give obediently as a result of your home debt, you should sell your house. Another example is if God placed it on a mother’s heart to take time away from her employment to spend with her children and the resulting lack of income made her family’s current house unaffordable, obedience could involve the sale of her home. When we chose a house, we found one that we could afford with either of our incomes so that Porter would have the option to stay home and we wouldn’t have to worry if Sherpa lost his job. Not everyone has that luxury. Another example is if the Lord calls a family into ministry and there are insufficient resources to maintain the family’s standard of living while remaining obedient. These are just a few examples. In our situation, selling our house was not necessary to be obedient to the Lord’s present calling on our lives.
Hike the Good Hike,
Sherpa and Porter