Rates Are Dropping. Should I Refinance?

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Speaker 2
00:28
Welcome everyone to this week’s Thin Lip by EWA Podcast, joined here by Jameson Smith. And today we’re tackling a very timely topic of When’s the best time to refinance your mortgage? If you’re at a high rate and we’ve seen rates starting to come down already, is it worth weighing the con of paying a closing fee? Typically we save 50 to 100 basis points of the loans. If you’ve got a million dollar mortgage, expect to pay 5 to $10,000 of a cost to refinance. Is that worth it to make the rate drop? We’re going to talk about the pros and cons and when to what the right questions, the right analysis are to go through with that. So James, before we get started, any timely events that you want to discuss first?
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Speaker 3
01:12
Timely events? There’s a lot of events going on we could talk about. I don’t know. What do you want to discuss?
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Speaker 2
01:16
We’ll just hit a quick one. I don’t think everyone wants to just talk about mortgage rates dropping. So sorry to put you on the spot. You got to come up with something.
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Speaker 3
01:27
Okay, so what’s, well we’ve talked about this in the past. So what’s the update on the, on your. We talk about what’s the update on your, your gin, your golf index. Where, where do we stand? As the, as the season’s coming to an end.
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Speaker 2
01:45
That’s a sore subject, James. I think I’m, I, I got down to a six something after my side. I had a labrum surgery called FAI back in November four months before I could swing a golf club. So from April I think to June or July I got down to a six. Unfortunately I had some flare ups, not surgical. So I’m still good with the persisack apparently and the hip flexor. So I think now we’re back to like a high eight, low nine. But we’re going to get it back down to a six before the season end. I’m public accountability right now. How about you? Where’s your trending up?
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Speaker 3
02:18
Suck. It was playing a lot of golf in June, July, four or five times a week Head up in the evenings, hit balls, play around. Was playing well. My lowest was a 12.
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Speaker 2
02:30
What are you right now, 13, six or something. That’s a pretty low gap for. So what’s your goal by the end of the year and then what’s your goal?
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Speaker 3
02:38
Well, my goal this year was to get under 10. It’s still in the cards. I just have to play more golf, which is really hard to do when you’re busy.
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Speaker 2
02:45
What are you busy with?
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Speaker 3
02:47
Working.
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Speaker 2
02:48
It’s my responsibility that you’re not a 10 or a 9.
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Speaker 3
02:52
No, just. Just working. A lot of stuff going on since.
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Speaker 2
02:55
Okay.
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Speaker 3
02:56
It’s just like anything, you just have to do it right.
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Speaker 2
02:57
What’s your goal by the end of next year?
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Speaker 3
03:00
Oh, I’ll be single digits next year easily. But I’m still shooting for it by. When’s the gin shut off? November 1st or something.
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Speaker 2
03:07
I think that’s information.
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Speaker 3
03:08
I built a spreadsheet on this to figure out what scores I need to. To get down under 10. It’s basically like in my. Am I. What do you need on my course? Like, I need like three or four, like 80 to 82 rounds like that. That range.
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Speaker 2
03:24
So definitely need a spreadsheet. Which. We’re gonna record this. If you’re not watching this on the. If you’re listening to this, we’ll make it so you can listen to it, but better if you watch it because I’m gonna be drawing on my iPad here. So just to start off, traditional refinance, obviously it’s in banks benefit. Okay.
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Speaker 3
03:44
So let’s just give a land of what’s going on.
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Speaker 2
03:46
You go ahead because I’m going to go.
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Speaker 3
03:48
Okay. So Matt’s like Rain man with these numbers and the spreadsheets way more detailed than I am. So he’ll go through the math. But basically, I mean, it’s been a kind of a talking point for a couple years now. Like winter rates going to go down. And so we saw. We’re recording this. I don’t even.
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Speaker 2
04:02
What.
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Speaker 3
04:03
I don’t even know what the date is. September.
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Speaker 2
04:04
Mid September.
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Speaker 3
04:05
Mid September. Something.
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Speaker 2
04:07
Mortgage rates just dropped.
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Speaker 3
04:08
Yeah. There was a Federal Reserve meeting yesterday and they dropped rates by 50 basis points. So rates are starting to come down, they think 25 to 50 basis points slowly over the next, I don’t know, months, year. And they’re still Fed, still targeting the 2% inflation rate, which we haven’t seen yet. Inflation’s drop. It’s not 2%. So bottom line, rates are high. Expect them to come down. How fast we have no idea what rate. We really have no idea. So let’s talk about the numbers.
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Speaker 2
04:36
Yeah, absolutely. So most people think very simply put, if the rates drop, I should refinance because it’s extra money per month. So what we need to take into consideration though is two things. One, well, many things. The first thing is if you’re an ARM and you can refinance from an ARM to a fixed mortgage, generally with a lower rate. That’s usually a good idea if you’re gonna, if this is your forever home. But a couple of things people don’t realize and they’re not honest with themselves, that average American moves seven to 10 times. And I’ve read different studies on this. So you move seven to 10 times over your lifetime.
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Speaker 3
05:16
I’ve already moved four.
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Speaker 2
05:17
Yeah, I’ve looked back and I moved every two or three years over.
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Speaker 3
05:20
The last 20 years, five years, I’ve moved four times.
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Speaker 2
05:23
There you go. Yeah. So I mean, most people don’t realize that. So if you buy a house, is that behavior going to change? Maybe, maybe not. Maybe life changes pretty quickly. So a lot of people don’t realize if you look back many times you’ve moved. You really have to give yourself a realistic time frame. So if you are going to be in this house until the loan’s paid off, it’s just numbers, right? We can just look at the numbers. But if there’s a chance you want to upgrade or downsize or, and you’re going to move in the next couple years, there’s a very high risk of refinancing because refinancing you’re going to pay 50 to 100 basis points. So let’s just use a million dollar loan.
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Speaker 2
05:58
For example, I just talked to a local banker here before this podcast at Prep and he ran me a quote at $1.4 million loan refinance that was going to cost the person $13,000 to do it. So you know, basically 90 basis points. So let’s just use a million dollar loan example. And let’s just say hypothetically now I’m drawing the screen, someone’s currently at a six and a half percent note and we’re just going to use a 30 year term loan. And so let’s evaluate, you know, potentially refinancing to a million year 30 year fixed at 6%. And then let’s also compare that to a full 1% drop. So a million at 5.5% and again also still a 30 year. So what we have to realize first is okay, what’s our monthly payment under these options?
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Speaker 2
06:48
So at 6.5%, this does not include taxes and insurance. The payment for this would be 63, 20 per month. If we get down to 6%, the payment drops to 5,000. I’m just rounding numbers by the way. There’s, there’s obviously cents that go along with these and then 56, 77. So right off the bat, I mean this is a savings of basically 3, 325amonth here that you could put to work somewhere else, I’m sure. And then this is a savings of, you know, 642 or 6, sorry, 643 per month. So you know, right off the bat, simple. Let’s just say this is going to cost us $8,000 to flip from this loan to one of these options. Well, right off the bat we know that’s 3600 plus that’s $3900 a year of savings.
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Speaker 2
07:53
So basically we need a minimum of two years in this example to break even. That’s our break even point. So we’re going to give up the $8,000 here. We’re going to get the $8,000 back basically in two years and half a month. Let’s say you could also weigh the investing cost of this. So this money could be invested in the stock market earning 7%. You could also invest this money. We’re just going to use really simple terms for now. And then over here you almost have a one year breakeven. So in either one of these, if you think, oh, 50 basis points, if I drop from six and a half to six, that savings is so attractive. Well, if you’re planning on moving in a year from now, you shouldn’t do that.
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Speaker 2
08:37
You’re going to end up losing $4,000 because the closing cost of 8,000 are going to be greater than the first year savings of 3,900, you need at least two years to break even. Now if you’re dropping a full percentage once you’re there a year, you’re pretty much in the clear. Anything above that’s profit and then there’s some pretty big savings. So let’s just say you’re there for five years. So if we just look at like what is left in the million dollar mortgage after five years and this first example would be 936,109. And the second example would be 930, 534. And the fourth example it would be 924, 606. But then when you add in the fact that you’re saving, you know, basically 4,000 a year in monthly payments here. If you’re disciplined to save that plus you have another $20,000 of cash here.
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Speaker 2
09:27
And then in this example, you’re saving almost 7,700 a year. So almost, we’ll just round up almost 40,000. If you invest that money on top of just having a lower loan balance, you’re also going to have that monthly cash flow to either save or spend in some other way. So very clear if the timeframe is, if we see a rate drop of half a percent or 1%, we’ve got a two year break even then a one year break even over five years. You de risk a lot. However, I’m going to bring up another option because what’s going to be very tempting for people to do is you’re going to see rate drop slowly is what the Fed has come out and say. So there’s a rate drop available now for people that have secured a mortgage in the last 12 months.
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Speaker 2
10:13
If you refinance, there’s probably 30 to 50 basis points. You’ll be able to get off your mortgage right off the bat. But another strategy would be doing what’s called a home equity installment loan. And generally speaking, let’s say you bought a million dollar house or you have a value of a million dollar house, you have $750,000 mortgage outstanding. Well, you could go and let’s say that six and a half percent.
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Speaker 3
10:43
If you how much equity you have to do this?
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Speaker 2
10:46
Well, you need to end up with at least 20% left in. Okay, so for, in this example, the first requirement for a home equity installment loan is now. The taxes and the insurance are now, they’re not escrowed. So these are your responsibility to set up payments through checks. So this right off the bat’s a little bit of a pain, but not a big deal. If you have your mortgage paid off, you have to do this anyways. With home equities, there’s no closing cost included, so you could switch. Now typically the bank will make you take some cash out.
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Speaker 1
11:22
When you’re doing this.
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Speaker 2
11:23
There’s got to be new money on the table so they can make more profit off the interest. So this example you could take, the ending result would be a $775,000 loan. Maybe rates have dropped and now you’re getting this for 5.5%. And so the end result is you go from a $750,000 mortgage to a $775,000 home equity installment loan, and these are over 25 years. This in the bank that we talked to would be a fixed rate. You’re responsible to pay your taxes and insurance. And now you walk away with $25,000 of cash back in your pocket. And hopefully you invest that money as well. The reason I would look at going this loan, if you have over 20% equity established, is you can keep doing this every year, no cost, at no cost, as rates drop.
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Speaker 2
12:09
So then regardless of your timeframe and regardless of your, if you’re unsure of your timeframe, if you see like I went from six and a half to six, now it’s five and a half, do I pay that well? No, you don’t have to worry about it. You can just keep going down and down. So I wouldn’t take all the equity available because again, for them to do this, you need to have. If the house is worth a million, home equity installment loan has to at least be 800. It can’t go over 800,000. So if you’re a max at 800,000, the rate drop again. You can’t do it again. So I would be slow and careful and just take a little bit out each time. But you’re going to save a lot interest just by doing that. Hypothetically.
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Speaker 2
12:46
Let me just run the numbers real quick. Like a 30 year, we have a $750,000 mortgage at six and a half, and if we just leave that alone for 30 years, you’re going to pay a total of $1.7 million in payments. So your monthly payment is 47, 40. Over 30 years, you pay a total of 1.7. Out of that, 1.7, 956,000 of that is interest. So you paid more interest than you did actually in the principal. And then if we flip this to a higher loan, 775, but we get a five and a half percent rate because we’re patient and we pay it off in 25 years. Your payment doesn’t really change. It actually goes up by $19. So 47, 59, however, so basically almost neutral with the payment.
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Speaker 2
13:40
But your total that you paid in is 1.427 million, of which only $652,000 is interesting. So you save over, you know, $300,000 interest by getting a result of two things. One, you have 1% lower interest. Two, you’re paying it off in 25 years instead of 30 years. And this is like pretty much a cash flow neutral move. And that way, if rates drop again, let’s Say to, you know, we have that $750,000 or $775,000 mortgage and then next year it drops. And now you’re, you take out an 800,000 home equity installment loan because now you can get a rate at 4.5%. Now you get another. So you go from 775 up to 800, you get another 25,000 in your pocket. And now we’re at four and a half percent interest over 25 years. You pay.
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Speaker 2
14:40
So your first of all, your payment now is 44, 46amonth. It’s actually lower. Even though you have a higher loan amount, that 1% makes a difference. You have a lower payment over 25 years, the total you’re going to pay is 1.33 million, of which 534,000 is interest. So again, you go from 956,000 of interest to 534,000, over $422,000 saved. And then while you’re making these moves from the traditional mortgage into the first home equity installment loan, the second one, there’s no cost or risk of you to do this if you move in a year or two. No harm, no foul, you didn’t pay closing cost.
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Speaker 2
15:22
The only thing is a little bit of time and track and get to write a check for the real estate tax, the school taxes, and then the insurance, the homeowner’s insurance, you need to just automate through an ACH from your bank account. So that’s it, you know, so please reach out if you’re considering refinancing a mortgage. You know, banks love it. That’s how they make, you know, closing costs isn’t easy. In that example, $8,000 they’d make. But be careful. Yeah. Make sure you take all around all these considerations on the table when determining if you should refinance.
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Speaker 3
15:55
Bottom line, if you’re living the house for 10ish years will most likely make.
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Speaker 2
16:00
Sense even to pay the closing costs. Yeah. If you’re getting a lower rate, 100%.
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Speaker 1
16:05
Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button. Make sure to rate the podcast and please share with any friends or family.
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Speaker 2
16:20
Members that would also find this beneficial. Thank you very much.