Basic Refinance 101

In this Refinancing 101 breakdown, Deb “The Mortgage Queen” walks through when refinancing makes sense, and when it absolutely doesn’t. From divorce and life changes to cash-out refinances, HELOC pitfalls, interest calculations, and break-even math, this video explains how to think strategically about refinancing so you don’t hurt your long-term financial future. If you’re considering a refinance, this is required viewing.

Transcript

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Hey everyone, welcome back to All Things Home Loans, Credit, and Real Estate. I'm your host, Deb, the Mortgage Queen. So let's start learning. Hey, it's the Mortgage Queen. I'm gonna talk to you today about refinancing, a basic refinancing 101 class. When we should do it, when is it cost effective? Why shouldn't we do it? And all of the rundown of that. There are a few reasons. Obviously, we just don't have a choice to know what the interest rate is going or what the interest rate is going to be doesn't matter to us because of the situation. Like for instance, probably the number one that comes to mind is divorce. If you've got somebody who's going through a divorce and there are two parties on the mortgage at the current moment, they're required to get that refinanced. Unfortunately, if you have a 3.5% interest rate and you have to refinance to get the spouse off, and now it's 6.5, it's kind of it is what it is. I mean, it's just kind of what it is. Obviously, refinancing into a lower interest rate uh is key. Uh, that's not uh very easy to do right now because rates are the way that they are. Also, changing your amateurization, paying on a 30-year, paying on a 25, and you have the ability to refinance that, get a little bit lower interest rate, and throw it on maybe a 15-year loan so that you can refinance or so that you can pay it off before you retire. Um, obviously, sometimes people get themselves into a financial burden and look to the equity in their home for a cash out refinance. And we have to really look at that because if we max out your cash out on your home, I'm gonna just jump down this rabbit hole for just a minute. If I have enough equity in my home and I want to refinance and put my big truck loan and my big car loan in that, we have to think we're amateurizing that little depreciating asset over 30 years, over 20 years, over 15 years, whatever it is. And the thing that I struggle with when we pay off cars in a cash-out refinance is you have a vehicle that's gonna probably have to be replaced in a few years. So we think about I am financially stressed, I have to get out from underneath this debt, I'm going to refinance my house because I have plenty of equity, I'm gonna roll my two vehicles into it. It's gonna free up some of my financial stress, but yet you don't change your financial habits. Then fast forward five years, now you're looking at having to re uh upgrade that car to maybe your car died, whatever the situation is. And now you've got this high mortgage payment, this vehicle that doesn't run anymore in that mortgage payment, and now you're stuck with getting a new vehicle payment. So we've got to be smart when we're coming to the point that we have maybe made some poor financial decisions, maybe we've got ourselves overextended, and then we're gonna roll it into our home. All right, well, that's great. Um, let's discipline, let's make sure that we've got ourselves lined up in a proper path so that we don't have a habitual cash-out refinance issue. A couple years ago, actually, it's more than a couple years ago, um, probably seven or eight years ago, I refinanced a gal. She had uh a little bit higher interest rate. It was before the big two and three boom that happened, and we were able to refinance her house and put so much credit card debt. She just lives off credit cards, and we refinanced her house, put it into uh just consolidated all of that uh credit card debt into her mortgage. And I just told her, this isn't gonna continue to happen. You're not gonna have values appreciate and you're not gonna have rates come down. You've got to live within your means, you've got to be smarter than this. And fast forward a couple years, we hit COVID, and she sent me a message and she says, Oh, I'm in financial trouble again. I've racked up all my credit cards, you got to help me. And I it was more frustrating because the values had gone up and she had so much equity in her house, and then we were gonna take her from like her seven and a half rate down to 2.75. And I told I told her at that time the same lecture, you can't rack up these credit cards again. They they do not, it just does not end well for you. And the fact that we're in the high twos on this interest and this equity that you've got right now, this is not happening again. So live within your means. And uh, about a year and a half later, uh, she reached out to me and she on a whim decided to sell her house. She was pretty much housebroke, and oh, it's just so hard. It's just disheartening to me when I try to give guidance to people and they are their worst enemy. Like follow a budget, pay attention to what's going on, don't overextend yourself. But unfortunately, it was a little bit too late. But let's talk about um kind of what goes on with a mortgage loan as a whole. When I start a 30-year mortgage, most of my money I pay in on my monthly payment goes directly to interest. Very little goes to principal. And it's that way for quite some time. I would say 10 plus years. On a 30-year mortgage, 10 plus years, if you look at your schedule, the majority of your money is going towards interest, a little teeny tiny portion is going to principal. So when we're talking about refinancing, that has to come into play because that's just how mortgages work. The servicer gets the majority of their income of that interest at the beginning of the loan. So if we're in a 30-year mortgage and we've paid on it for seven or eight years, yes, we're still paying the majority of our in uh our uh payment into interest and still a smaller portion is going to principal, but we're getting closer and closer and closer to that pendulum swinging the other direction. So I have a say a 7% interest rate, paid on it for eight years, let's just say eight years, and I'm looking at refinancing because interest rates are at 6%. Logically, that makes sense, right? I'm going from that high of an interest rate down. Okay, yes, that only makes sense if we're probably looking at doing a 20-year mortgage. Because if not, you have to look at how much interest you've paid in, how much interest you're going to pay, and it just the math isn't gonna math. So you've got to have a really good math calculation and figure out, wait a minute, just a second. The seven looks terrible. The six looks great. I've paid on it for eight years, okay. But you're starting back over if you do not uh lower that amateurization down just a little bit. So anybody who just wants to refinance you just because it looks good and and maybe it it saves you on a monthly payment, um, let's make sure that that monthly payment is needed. Maybe that monthly payment savings isn't needed. Maybe you can just keep doing what you're doing and actually be further ahead. Maybe you can roll into a 15-year mortgage and essentially be paying the same monthly payment that you're paying right now, but have it paid off seven years faster. It's definitely a conversation to be had as to whether or not it is cost effective to go through that refinance. Now let's go back down the path of um like divorce. Situations where you just don't have an option. Um, you have to buy out a spouse, somebody's passed away, and um you're remarried and your new spouse wants to be on the loan with you, or whatever the case might be. I I'm looking, I'm just kind of playing out in my mind, and really the only time you're pretty much forced to refinance is going to be in a divorce situation. Most cases, if a spouse passes away, just keep making the mortgage payment. The mortgage company doesn't really come chasing people. I just don't, I mean, I could be completely wrong, but I just think as long as that mortgage payment's being made, even if one of the primary wage earners is uh deceased, I just don't think the mortgage company is gonna call that note due. I don't know, there's probably some note in the D to Trust somewhere that says that they can call it due if they need to, but um the big thing that we have to remember is there is a perfect calculation of how much interest have I paid in, how much interest will I pay in if I refinance this? How much have I already paid and how much was my original? So let's put this into a scenario. On my what used to be a truth in lending, now it's on my um closing disclosure, it says, hey, over the life of this loan, if I don't make any extra payments, I'm gonna pay$350,000 worth of interest. Okay. Fast forward a few years, and let's say I've paid$50,000 worth of that interest. Okay, so out of that loan, if I continue to make that payment going forward, I have$300,000 worth of interest. Nothing changes. I'm making my minimum payment, just doing what I'm supposed to do that way. If I just continue down this path, I have$300,000 worth of interest left to pay. Okay, now I'm going to compare that to a little bit lower interest rate, change my amateurization schedule, increase my loan amount just a little bit to cover closing fees, and I look at that same APR and calculation of interest, and it says, hey, if you start this 30-year mortgage back over, over the life of the loan, the interest charges you'll have are$325. See, that's negative. Even if your monthly payment goes down, you're going backwards. It's not a benefit. Now then we take it a step further and we calculate and say, okay, well, if I do refinance this lower rate, it so it shows that I'm gonna have a$325,000 interest charge on this new loan in comparison to my current loan being$300, but now I have a$300 lower monthly payment. Okay, so now let's compare payment to payment. And if I say, okay, well, I'm gonna just continue to make that same payment, but more of it's gonna just go directly to principal, what's gonna happen? See that calculation changes. So as we do all these math calculations, we have to calculate apples to apples everywhere. So if we are, if we're looking to see if interest changes, um, interest reduction helps us in the long run, we have to look at how much interest we have left to pay on the current loan, how much interest I'm going to be charged on the new loan, and then from there calculate what my monthly payment savings is. And if I don't need a monthly payment savings, that needs to come into play as well. Now go down the route, the other path with that. If we're drowning, if something's happened in our household and we have 20 years left on our mortgage, and the only thing that's gonna save us and save our house is to re-ameterize that over to 30 years, if that drops your monthly payment enough, sometimes we can't look at those math calculations. Sometimes the reality behind that is life happens and we have to figure it out a different way. And so we can do a no-cash-out refinance uh cautiously, cautiously, and making sure that the closing fees and the benefits there, there is a rule in place for benefit to borrowers, so we can't have habitual uh loan officers just refinancing loans because the naive consumer doesn't know the difference, which I'm very grateful for. Uh, I I definitely am sad that that law had to be put into place or that rule, that guideline, whatever. I it's probably not a law. I don't know. Um, another thing to think about too is if we're currently paying an FHA mortgage, because that's what we needed, maybe our credit scores weren't quite where they needed to be when we purchased the home, but we have since finished the basement, credit scores are higher, appreciation just naturally in the market, and we're thinking, hey, maybe I don't have to pay this FHA mortgage insurance, and the interest rates have dropped just a little bit from where I'm at. Maybe we can look to see if refinancing can get rid of that mortgage insurance. Yet we have to remember just because we get rid of the mortgage insurance and have a little bit lower rate, we still have closing fees. We're still resitting in amateurization, we're still needing to do that math calculation to make sure that it's cost effective. And uh the thing we have to also remember is if you are in financial stress, you've racked up credit cards, you've you've bought the most beautiful car and most beautiful truck, and you have wonderful payments to uh to go along with that. Um, we don't want to do a cash out refinance to finance in leisure items or maybe a little bit higher end something, something that we just don't need. Uh having equity in your home is definitely um a plus, but having equity in your home that you don't touch is is slowly heading you into financial freedom. If you touch it because you're going to leverage it to do something wonderful, that's great. If you touch it because you got yourself into financial stress with a with uh revolving debt or out-of-control car payments, that's a little bit different situation. And we need to have a little heart-to-heart. And we need to have uh school by deb. And let me put you back in your place as to why you should probably live within your means just a little bit more. I just have seen way too many people get too strapped financially. Divorces happen when you're financially stressed, um, stupid things happen, you're making poor financial choices, you're making poor decisions, you're making sporadic, um what's the right word? Uh you're not you're not thinking through things. You're just you're just reacting instead of having a plan in place. And that gets pretty scary when money's involved. And I've seen a handful of people turn pretty shady. There's actually a few people in our industry um that uh money has stolen their integrity. They've given up their integrity for the the Almighty Dollar, which is very, very sad. Um, if we are going to go down this little rabbit hole of what people have done, there are a ton of people that did not want to touch their twos and threes and even low four interest rates on their first mortgages. So they went ahead and threw HELOCs and second mortgages behind their homes. That's all fine and dandy. Other than think about this, a HELOC is like having a credit card and your house tied to it. And unless you're very disciplined, I have seen these HELOCs get completely out of control. In the last two weeks alone, there have been four credit reports that I've pulled, and those HELOCs were$75,000 to$100,000 worth of debt owed. I need you to think of those HELOCs as if they're credit cards. Could you imagine how you'd feel if you had a$75,000 credit card maxed out? And then take it a step further. Your house is secured by that. So if you don't make a monthly payment on your house, guess who gets to come knock on your door and look at maybe taking your home from you? We've got to think those HELOCs are a really good avenue to get equity. But they're not just swipe, swipe, swipe, swipe, swipe, go to the store, buy whatever you want to buy. That there's ramifications for that. I'm looking at consolidating these people out of their massive interest-only HELOC payments because they can't make ends meet. And they're an adjustable rate and they're amortized over 20 years, and they cannot, they just can't make this come together. So now we're taking two and a half to three percent interest rates and a six and a half to eight and a half percent HELOC, consolidating them into one, it's freeing up their mortgage pay or their monthly payments, but wow, we do the math on that and the amount of interest that they're gonna lose because of it. But unfortunately, their monthly payments, they can't sustain those monthly payments. So poor financial decisions of tossing HELOCs behind your homes, not a great idea. Now, with that being said, I do have people who have HELOCs on their homes, they're leveraging them to buy other rental properties and they're leveraging them the right way and being smart about it. So there are ways to be able to use that HELOC and have it be advantageous. But if you're listening to this and you are drowning because you were one of those people that just racked up that HELOC and you're sitting between a two and three and a half percent interest on your first mortgage, you might not have a choice. It's either be homeless or refinance and reap the benefits of your stupidity for the rest of the 30-year mortgage that you've got. It is that simple. Or you could look to sell, but to be able to change your home from where it's at right now, it might not be cost effective. You might not be able to replace your home. Maybe your home you have right now, you already know what the problems are with it. So you don't want to pick up somebody else's problems. It's just um basic math calculations that I would just recommend. Let's look at the whole big picture. Let me calculate. This is what it looks like if you just buckle down and you get that HELOC paid off. This is what it looks like if you just buckle down and get that first mortgage paid down so you get rid of your mortgage insurance or whatever the whole situation is. I would definitely task you with let's run the calculations if you're dying in your monthly budget. And uh a wise man once told me once that if you have more month than you have money, then there's a problem. So I get to the end of the month and I'm out of money and or I'm in the middle of the month, I'm out of money. So I have more month than I do money, tends to be an issue. Um the the cost of refinancing is is there. There's just some fees, even if I wanted to waive every one of my lender fees because I could. In the situation, I could waive them. You still have title insurance, setting up your escrow account, depending on what the situation is, you might have to have an appraisal, paying for a credit report. Um, there's just a lot of little fees that nickel and dime that has to come into play. When we're calculating whether or not it's cost effective to do a refinance, we have to go into to uh consider take into consideration those refinance fees. Um right now the rate environment is slightly different. Uh 15 years ago, when we would calculate these, like okay, we're dropping our interest rates three quarters of a percent, uh, reametrizing over a 25-year loan. Uh, yep, okay, this makes sense, and here's the math why. Uh just kind of as a side note, that's why I like the truth in lending. Back in the day, I would get people to give me their actual original truth in lending, and I could calculate based off their principal balance how much of the interest that they had paid, and then okay, compare it to the new one and how much interest will you pay. Uh, the CD that we've got, the closing disclosure right now, isn't quite the same. Uh, so calculating interest is slightly a little bit different, but eh, whatever. He who has the gold makes the rules, and it isn't this chick, we've learned that, right? Um, the thing we also have to do is uh look at the picture, you still have to qualify. You still have to qualify in your debt to income ratio, you still have to qualify with credit. Um, there are streamline refinances, which FHA and VA both have, what's called a streamline or an ERL, which basically rewrites the mortgage for the amount of money that you owe on it and uh take advantage of a little bit lower rate. There are definitely some particulars to that and uh definitely an algorithm of benefit to borrower, and those are very, very strict calculations because it has to make sense. You're still re-ameterizing over a new 30-year period of time. There still are um some costs involved in certain cases, however, however, we strategically put it. Sometimes the FHA requires appraisal, sometimes it doesn't, depends on um how we want to structure that. Um but I would definitely say uh if you're in a higher interest rate because you bought, oh, I don't know, 2020, probably the end of 2024, middle to middle to 2024 to end, um, you probably hit some of the highest of the interest rates. It might be worth looking at refinancing. What's crazy is if you call me, it's a simple get your paperwork that you got from the title company, have your current mortgage statement handy. It's a simple math calculation for me. Spend 10 minutes on the phone with me. I'm gonna calculate where your breake-even point is. Maybe you're at seven and a half right now, maybe interest rates are at 6.5. Where is your break-even point? Okay, we have to have, and this is not this is not reality, um, you're paying 7.5. We calculate it's like you can't refinance this and have it be cost effective until it's 6.25. Great. Then we're gonna monitor the market and we're gonna make sure that you're locked in at that 6.25 rate. It is that simple, and we can figure that all out for you. Um, your escrow account, this is something that also gets a little bit confusing. When you refinance it, you have to reset up your new escrow account. But when the current mortgage gets paid off, that escrow account gets refunded. That's money that you can do whatever you want. I tell people that they can take that money and dump it right back towards their mortgage because technically you borrowed it to be able to put that escrow account back in place, or stash it in your bank account, throw it in a savings account, have a little bit of a rainy day fund. The the refinance part of this is gonna be an interesting thing to have over the next, I would dare say, two to three years, because we have these so many interest rates out there that are in the twos and threes that nobody's gonna touch those. The problem is those HELOCs are gonna creep in and we're gonna have issues with those HELOCs, and we're gonna need to refinance before you get into financial trouble so you don't have any late payments on credit. A simple math calculation, a little bit of uh conversation as to what does your financial plan look like? Where can we help you discipline yourself so you don't get yourself back into trouble again? It is that simple. I absolutely love this part of my job. People will call me and they'll just say, Oh, I don't want to waste your time. No, seriously, this is my favorite part of my job is to try to talk you out of refinancing. Because if I can talk you out of it, that means it's not a good idea. If I tell you it's a good idea, I have the math calculations behind it as to why we should do it. I have had people when I've said this is not a good idea, is this is not cost effective, it's only saving you$200 a month. I have had plenty of people over my career say, we don't care that$200 is what's gonna save us. We have no choice, we have to do this. Okay. Obviously, there's some unseen debt on my side. I don't see what you're paying for prescriptions every day. I don't see what you're doing for groceries, gas, um, extra things that are just important to you in your home. Um, I just get to see what's on those credit reports. But I uh absolutely challenge you. Um, number one, if you're living off credit cards, knock it off. If you are racking up your HELOC with just nickel and diming things, swipe, swipe, swipe, swipe, swipe, stop. And at this point, you've got to really rein in your finances. Our economy is okay. It's not okay in certain aspects of it. When you know the behind the scenes, it's not okay. Uh, are we on the verge of a crash? I don't think so. Are we on the verge of a correction? Yes. I do think there's gonna be a little bit of a correction. Do I think it's an 08 correction? No, I don't think we have an 08 correction. I don't think we have the shady loans that were going on back in 2008, but we definitely have a correction coming. It's already starting. We're seeing these price points level out. We're seeing sellers remove their homes off the market. We're seeing a buyer's market at the current moment. And so this correction at the end of 2025 is necessary. And we just hope the interest rates continue to just kind of hold out, maybe go down just a little bit. So of our some of our little first-time home buyers can't afford to be in the market right now. It'd be nice to have those rates come down just a little bit more. But with that being said, I just want to leave you with a couple bits of advice. Your home is your biggest asset. Your home is where you can consider a sanctuary for yourself, your family, friends to come, friends of your children. And you need to protect that. Do not leverage it for your uh willy-nilly spending habits. Protect your home because that is your sanctuary. And with that, I'm just gonna peace out from the Mortgage Queen until next time. Thanks so much for listening. I really appreciate it. So stay tuned. We are gonna learn some more next time.