In this episode, Scott & Nikita discuss refinancing.
Often times refinancing is sold as a "no brainer" if you can lower your monthly payment. There are, however, some additional aspects to consider.
Including, but not limited to:
If you're evaluating this decision for yourself, these tools may be useful:
In this episode, Scott & Nikita discuss refinancing.
Often times refinancing is sold as a "no brainer" if you can lower your monthly payment. There are, however, some additional aspects to consider.
Including, but not limited to:
If you're evaluating this decision for yourself, these tools may be useful:
How's it going everyone. My name's Scott Bennett,
Nikita Wolff:I'm Nikita Wolff.
Scott Bennett:And welcome to the 3rd Decade podcast. Thanks for listening with us. Today we're gonna jump into talking about the decision whether or not to refinance your home. And it is something that has come up a ton and it actually came up in a conversation between Nikita and I. Her personal decision, whether or not benefiting from refinancing would be, would be right for her.
Nikita Wolff:Yeah. So my example is a little bit unique, but I'll share it anyways. Cause I think it demonstrates some other overarching points, but basically I reached out to my loan officer to ask a question a month or so ago. My husband, I bought our home using a first time home buyers program back in November of 2018, it came with a few stipulations, but we decided that the pros of the financial benefit outweighed the cons. Basically they would contribute close to$20,000 towards our closing costs and our down payment if we agreed to stay in the house for five years. And so the rules state, however, that if you don't stay, you have to pay it back. So you can see they might lure you in with that. But then if you don't stay, it ultimately ends up kind of harming you financially, cuz you're, buying into, um, some of the other stipulations on it are like a higher interest rate. There are less than favorable things about first time home buyers programs. If you don't stay for those five years and, get to keep that cash they're gifting you. So it's, it's almost like a secondary mortgage against their home until we reached that five year mark. And basically I reached out to our loan officer to see a refinancing was even allowed with our program because our interest rate sits a little bit above 5%. So it's pretty rough<laugh>.
Scott Bennett:Yeah mcuh higher than they are currently. As we're recording this, you can get under 3% for a 30 year.
Nikita Wolff:Yeah. So basically, the answer from our loan officer was yes, we would lose the benefit of that$20,000, meaning that we had to pay that back. Um, but he treated it like, it was like a no brainer. He was like, well, yeah, with, credit scores where your guys are at. Cause we gave him like estimation so that he could run some general figures for us. He was like, your, your monthly payment will be less. And that was kind of just like where it stopped at. So I was like, okay. I mean, thankfully I'm in this job. I know what to look out for. I know what questions to ask. And I gave Scott a call and we decided to kind of crunch the numbers together in like a side by side comparison. And while yes, my monthly cost may have been slightly less like forfeiting that$20,000 in, equity. Was it wasn't something I was willing to do because of the fact that if I just waited a couple more years and I got that equity free and clear, then, then I could refinance and actually keep that equity. And then my payment would be much less. So while it's a little bit of a gamble, cause I don't know exactly what interest rates are gonna be in two years. I'm doubting that they're gonna be worse than what I currently have. So yeah. I guess all of that is to say, um, it's not always super cut and dry, so sometimes you need to run those numbers in like a side by side comparison. And also it's another good reminder that you don't take advice exclusively from somebody with a vested interest.
Scott Bennett:Yeah and your situation highlights that piece and just the overall complexities of refinancing. It, is a pretty big decision even though I think, think it's kind of being packaged right now as everybody's doing it. Um, yes, interest rates are at an all time low and yes you should, if you own a house, you should probably be exploring the options. But, um, there are a lot of factors that, that come into it. So we thought it would be helpful to after talking through it ourselves. Um, and, and looking at it that let, let's start at the basics here and what what's some good starting points for participants of, the 3rd Decade. If, if they run into this situation now or, you know, 5- 10 years down the road, how do you think about refinancing a nd, getting t o that? So I always like t o, a re w ith, the most basic question of, of why are you refinancing? It seems, seems pretty obvious, but a lot of times people don't even think about that. They just think, oh, I can get a lesser interest rate. So are you refinancing just to reduce your rate? So to go from 5% to 3%, or are you changing the terms of your law loan? That's another reason people refinance and go from a 30 year, uh, mortgage to a 15 year or you getting cash out of your principle. That's another thing people do, all of those reasons kind of affect each other and they act very differently. So let's take, the idea just, for basic conversation. The, idea of somebody being five years into a 30 year mortgage, and deciding to refinance to save 1% i n interest you're then signing up for another 30 y ear mortgage.
Nikita Wolff:Right. And with that amortization schedule, that interest is front loaded mostly in the first five years anyways.
Scott Bennett:Yep. So you end up paying more over the course of the long term and it's, counterintuitive because your monthly, payment is going down, but you're restarting that loan. And, so just for, you know, t he, the 1% in difference, if you're planning on staying and, and paying that o ff in 30 years, it's not always that cut and dry. If you save on a per month basis, what are you doing with those savings i s another thing. If you're saying, okay, I'm gonna cut my mortgage by$200 and I'm just gonna go out and spend that$200. You've effectively borrowed that money still.
Nikita Wolff:Right. The only time it would really make sense is if you were really like, kind of strategizing and using that money to invest instead
Scott Bennett:Yeah. For the long term and, thinking about it or, saving it, u m, n ot even investing it. I mean, some people look at that and say, I'm just gonna save that towards my next down payment. But spending it you're borrowing more right. As we talked about that 30 yea r st art over jus t to spend more, u m, w h ich, which is, i s not always the best decision. Um, an d some people as we talked about, u h, ge t cash out of their principle and, and th ey say, you know, it's part of their loan. We might not lower our monthly, but we're gonna get 10-20 grand out. Now it can be a good, good idea if you have a big project or something to do in your home and to have tha t ca s h, i nstead of having to, to bo rrow it somewhere else, you're, upping the equity in your home, but the real estate market's pretty unpredictable, you know, is what you're doing today, necessarily gonna up the value of your home by that 10 420,000, or again, are you just borrowing to save?
Nikita Wolff:Right. I also feel like a lot of the, the home improvements that we're told, like will add value to the house, don't add nearly as much value as what people say they do.
Scott Bennett:Yeah. I mean, I know when we were doing ours, w e redid our b ackyard. That is o ne thing my wife and I did when we bought our house, and it was a different real estate agent who said, you know, unless you're adding to the square footage of your home really rarely does it not raise your home value by more than, u h, half of what you spent? So, you know, it, u h, i t was something that we did because we wa nted t o d o it. It's, it's added to our value of the home. Right. Cu z w e use it an d s tuff. But if t hat's yo ur, your sole purpose of doing something, u m, a re you borrowing more to spend more again. Another question that you have to start with when you are looking into refinancing is how long do you plan on being in the house? I'll use my wife and my example, we chose to refinance about a year ago now. And when we did that, we, saved a little bit more than 1%. U h, we were, we were not that far into our 30 y ear mortgage. So kind of that, that first example that we just talked about, we were in that, but in doing the math, looking at the closing c osts and the fees and expenses associated with refinancing, we said, we're gonna end up saving. U h, it was around$200 a month to refinance and our closing c ost fees and everything like that was around$4,000, u h, in order to refinance. So just some really basic math. It was, we have to be in this house or, expect to be in this house for more y ears. For i t really, to make sense, u m, of doing that, just
Nikita Wolff:For that math is, do you mean just for that math to like breakeven.
Scott Bennett:To breakeven, so at$200 a month, that we're saving and 10 months, uh, that's$2,000. And so we're, we're not even halfway to where we were. So, um, it, and it came out almost exactly, cuz there's a little over 4,000, in closing costs and fees came out almost exactly to two years. So we just multiplied out that$200 a month and said, okay, we have to be here for at least two years. And we have to make sure that that we're just upping our spending, uh, to do that. Uh, cuz we tacked on more time to our loan. Um, when we, so we, we stayed at a 30 year and we said, we are gonna save this in some other areas we had recently had a new girl and we said, we can target some of this towards her college savings. And because it, it made sense for us to do it. But if we decide to sell or leave the house in less than two years, we end up paying more in closing costs and fees, then we end up saving and I know that's really basic, but when you're sold, these refinances like happens. Sometimes you get reached out to, Hey, here's all that you can be saving with a refinance that doesn't come into play as much because in the grand scheme of things, if y our mortgage$300,000, w hat f our,$4,000 added to that a nd c ost s ome fees. You're not seeing that over the l ong t erm, but, but you are, it's part of your l oan still. So you have to make sure that y ou're, bringing it into the equation.
Nikita Wolff:Right. Really quick, Scott, I wanna jump over to the conversation you and I had recently where I learned that 15 year mortgages tend to have smaller interest rates for some reason, in my mind, I thought it was opposite and I was wrong. So I guess this is something, another thing you could do if you were being strategic with your money is if you weren't necessarily to lower your monthly payment, but you're looking to take advantage of a lower interest rate and pay off a loan faster. If you have the means you could refinance from a 30 to a 15 and get that smaller interest rate and just pay off your home faster.
Scott Bennett:Yep, exactly. Uh, they, they can be a great alternative can be a little bit limiting. Uh, if you, if you are upping your, your payment, you know, y ou, i t, it all depends on your c ash a nd, a nd if you can keep a h old o f that, but yes, the way to think about, u h, loans in general is b y saying, what's the probability that I'm going to pay this loan back or that the person you loan money to is gonna pay the loan back. U m, and so at a 15 year loan, less can happen. You're more probable to pay that back because less can happen over the course of those 15 years than over 30 years. And so that's why those interest rates are, a re usually lower. So yeah, it is worth looking into when we've seen big drops. When you hear that mortgage rates are at an all t ime low and you can say, oh, I, I can save on that. You know, a lot on my mortgage rate, it might be, you might be able to look i nto a 15 year and say, I'm paying around the same amount that I did in the 30 year. U m, another thing to think about there is, 15 years are lower in interest, but if you don't know if you'll necessarily have the c ash, most mortgages, let you pay more towards that mortgage, if you choose to.
Nikita Wolff:Right. Calling and making a principle only payment.
Scott Bennett:Yup, Exactly. Yeah.
Nikita Wolff:As a quick aside, if you ever do that, make sure you say, apply this extra payment towards principal only because you can, make a payment and it ends up going towards like future interest and principle. And that's obviously not what you're trying to do. So if you call, state the, that you're making that payment towards principle only
Scott Bennett:Good point there. Um, another thing to ask yourself when, you know, the, the hoopla of refinancing is, seems to be in your face like it is right now. Um, can you qualify for the lower rates being offered? Don't do it so far down the rabbit hole and then realize, oh no, you know, everybody's telling me I can get under 3%, but because I have some credit issues, et cetera, et cetera, I might not be able to even do that. Um, and, and so you, you might not see the benefit of it again, really basic question, but.
Nikita Wolff:Yeah I got like probably 10 different letters in the mail that have been offering me refinancing and advertising numbers at like the 2.7, 5% or whatever recently. And I have a good credit score. I don't have an 850 credit score, but I'm guessing those numbers are maybe based off of 800 plus scores because whenever we called and we had ours estimated using our current credit scores, it was like three point, I wanna say, it's like 3.25 or something like that. So that is not the number that they're advertising. So yeah. Don't let it suck you in before, you know what it's actually gonna be for you.
Scott Bennett:Right, right. And yeah, it can be a long and frustrating, process. So don't let that fact say kind of, oh, I've already dove so much into this. There's no way I can back out now. U m, and that, that leads me to my next point. If you are thinking about it, get some real quotes with actual numbers and spend some time comparing them and crunching them.
Nikita Wolff:Mm-hmm<affirmative>, there are free spreadsheets online that will allow you to do those side b y s ide comparisons. I can link one of them in the, in this podcast, info section as well.
Scott Bennett:Yeah. Good idea. Because when you have the real numbers in front of you, you have to have the real conversations. When my wife and I knew we're gonna be saving around$200 a month. Um, and, but, and here are the actual closing fees and costs, and you might see again on those letters, no closing fees, no cost, um, no closing costs associated. They're, they're selling you this loan for some reason.
Nikita Wolff:Right. If you, if they make it look like they're not financially benefiting from it. Read more of the fine print.
Scott Bennett:Yeah read more of the fine print and, or, get the quote and see, okay, where's all of this coming from. Spend some time actually crunching the numbers because when it's real and in front of you, you kind of have to do it. And, so get a few and see if it's something you w anna do, but don't feel like you do not have to. People don't know this, but you do not have to refinance with, the bank that you w ere originally f inance through. You can go and shop r ates and get a few different quotes, which is always a good thing. Especially for most people, their mortgage is the most amount of money they're ever going to borrow. U m, and, and it's, it's a really key decision. So get a few, if you, if you have the time to do so. Cool.
Nikita Wolff:I hope that this is helpful for anyone listening to this. I know it is kind of a messy decision sometimes, but hopefully we've given you a few concrete tools you can use in helping navigate that decision for yourself.
Scott Bennett:As always, you know, we talked in really general broad terms here, and each situation is very different. So make sure if you're thinking about this, you are checking in, with your, your mentor. If you have one at a 3rd Decade with your CPA, if you have one and the, the loan officers themselves, and, uh, don't get intimidated by the numbers, by the math, do a little due diligence, dive in and, and understand really what you're signing up for, which is the key key to most things. So thanks to everybody for listening, and we will talk to you all again in a couple weeks.