Is now a good time to refinance your home? Have you ever even considered it? On this week’s episode of The Invested Dad’s podcast, Josh and Austin dive into all the details of what is might look like to refinance a home. They discuss private mortgage insurance, interest savings, adjustable rate mortgage, home equity cash outs, and much more. Listen in to hear more about costs of refinancing, what it looks like at different stages of life, and why you might need to consider it. All of this and more on this week’s episode. Listen now!
Main Talking Points
[1:59] – Equity
[4:46] – Private Mortgage Insurance
[7:04] – Interest Savings & Mortgage Calculation
[16:27] – Dad Joke of the Week
[17:39] – Watch Your Payment Amount
[19:18] – Adjustable Rate Mortgage
[22:40] – Home Equity Cash Out
[27:14] – Property Tax
[29:07] – Costs in Refinancing
[33:02] – Refinancing at Different Stages of Life
[35:50] – Is Now a Good Time to Refinance?
Links & Resources
2 BIG Reasons to Consider Refinancing – The Everyday Advisor
When to Refinance Your Mortgage
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey. Hey. Hey, welcome back to The Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. Today, Josh, we’re going to be talking about a re-fry.
Josh Robb:
Re-fry, that’s like those beans you put on at the restaurants and stuff, right?
Austin Wilson:
Oh, refried beans. So seriously though, I’ve really gotten into mixing beans, Mexican beans. With my Mexican food, I like refried beans mixed with black beans. Cook them both together and then put that on your burrito.
Josh Robb:
It’s that good? It’s Amazing?
Austin Wilson:
Yes. It’s awesome. Don’t ask me how.
Josh Robb:
Sounds good.
Austin Wilson:
I know, but I’ve eaten a lot of them. It was kind of actually, we were like running low on one kind of beans and we just mixed them up.
It was good. So take note, mix your beans, black and re-fried, good combination.
So no, no, no. Josh, you’re not correct though. It’s not the type of beans we’re talking about, much to your chagrin. But we’re actually talking about mortgage refinancing. So that’s really taking your existing mortgage and converting it to a new loan with more favorable or different terms depending on what your need is at that time.
Josh Robb:
That’s right. And Jess, one of the advisors here at Hixon Zuercher, we did an episode on women and investing, and she writes a blog called The Everyday Advisor.
Austin Wilson:
Subscribe. It’s awesome.
Josh Robb:
Great blog. She wrote two big reasons to consider refinancing. So please check that out. She’ll have some great details in there. And so that’s a great spot for some awesome, awesome blogs on finance.
[1:59] – Equity
Austin Wilson:
So she’s got two, we’re going to give you a couple of our thoughts on that as well. And the first one is equity.
Josh Robb:
Yes. Equity. So when we’d normally talk and we’re talking about equities, we’re talking about stocks.
Austin Wilson:
Correct. Well, it’s kind of the same.
Josh Robb:
It is in a sense.
Austin Wilson:
It’s in a sense, the same. It’s things you own.
Josh Robb:
Yes. Things you own. But when we talk about equity, when it comes to your home, it’s really the value of your home after your debt.
Austin Wilson:
Correct. Yeah. So let’s think about this.
Josh Robb:
Yes.
Austin Wilson:
A lot of people may not understand that if you go buy a house and you have a mortgage, you don’t actually own your home.
Josh Robb:
Or at least not all of them.
Austin Wilson:
News alert, you don’t technically own your home if you have a mortgage. Now that’s not all. Now some people can pay cash and that’s great. And then you do own your home. But you only own a portion of that home until it’s paid off.
Josh Robb:
But I can still check the box when it says, “Are you a homeowner or a renter?” I can still check that box.
Austin Wilson:
Exactly. There’s no middle ground mortgage, it’s like, “Nah it’s on mortgage.”
Josh Robb:
The bank owns my home.
Austin Wilson:
So yeah, that’s usually done through a mortgage. It’s the most common kind of large debt in personal finance. So here’s an example, so Josh, you buy a house.
Josh Robb:
I buy a house.
Austin Wilson:
$200,000. You put cash, $40,000 cash down on that $200,000 house.
Josh Robb:
Wait a minute. Why 40,000?
Austin Wilson:
Well, that 40,000, if you take 40, over 200, you get the magical number of 20%. Okay. So you own 20% of your house. So that’s called equity. You own that 20% of the house and the bank then owns 80. So that 20% is generally recommended because it’s the level that most lenders consider safe enough to not penalize you with what’s called PMI or private mortgage insurance. And we’re going to talk about that a little bit more here in a second. But equity is essentially the inverse of that loan to value ratio that the banks look at. So the banks, they really care about what they are owed-
Josh Robb:
What are they stuck with?
Austin Wilson:
Versus your care about what you own. It’s just the other end of things. So that same example, that loan to value ratio says that you own 40% of the $200,000. So you own 20%. But that loan to value is $160,000, is what the bank is owed of the $200k. So they have LTV of 80%.
Josh Robb:
And that’s considered safe is that-
Austin Wilson:
20%.
Josh Robb:
If let’s say your home property drops in value, the bank is saying, “The chances that your home will drop 20% of values, it’s not great. We’ll take that risk, but we don’t want let’s say 5%.” Because there’s a chance that if something happens in the neighborhood or there’s changes to zoning or whatever, you could lose a little value and they would be then underwater. Where then the bank says, “If we had to sell this home, we won’t get our money back.” Such a safe, safeguard.
[4:46] – Private Mortgage Insurance
Austin Wilson:
It’s much less risky for the bank. Just loan 80% versus 90% or a hundred. They won’t loan 100%. But till 80% or 95% or whatever, in the middle. So PMI, is the thing we mentioned. Private mortgage insurance. So what is that?
Josh Robb:
Yeah, that’s a great question. So private mortgage insurance is the idea that let’s say I can’t put that 20% down. What we just talked about. So the bank is saying, “Well, we’re going to take some additional risk here. So what you’re going to do is you need to get this private mortgage insurance, which in a sense is covering that difference between there.” So essentially you’re buying, if you want to call it the equity or buying that down payment. And so then the bank says, “Okay, we’re still covered our loan devalue, we’re still 80%.” This insurance is covering the difference between what you can pay. So let’s say you can do 10% down. I can do $20,000. That other 20% that they need, will then be part of this PMI, this private mortgage insurance.
Austin Wilson:
So I guess how it relates to what we’re talking about with refinancing is refinancing can increase your equity in your home. So suppose you don’t have 20% to put down. You still want to buy that $200,000 house. You found a great deal. You don’t have $40,000 laying around to put down on the house. You only have Josh $20,000 to put down. So 20,000 on 200 is 10% and that’s below the magical 20% figure. So then if you bought the house and then even right away, you’re like, “Hey, I’m going to try and refinance. But my housing market miraculously went up overnight.” Look to refinance all other things equal, but your home got reappraised at 225 versus 200. And suddenly you only owe $180,000 of the value, which is now two 225 instead of 200. So that loan to value is now 80%, which means you have 20% equity, which saves you paying that PMI each month. Which is really just cashed down the drain. So you can save a $100, 50, 100, a couple hundred depending on size of the loan every month, that you’re just throwing away to-
Josh Robb:
To cover the insurance. To cover the mortgage.
Austin Wilson:
You’re not paying it anymore. And that’s just for refinancing. Your whole loan is the same, but your house got appraised at more. So that’s pretty awesome.
Josh Robb:
Yep. And so that’s one quick, easy thing just about why refinancing just makes sense from the standpoint of, as your home’s value goes up, then the amount you owe is less as a percentage of that house, all things considered equal.
[7:04] – Interest Savings & Mortgage Calculation
Austin Wilson:
Exactly. So another saving that you can have when you think about with refinancing is interest savings, because obviously you pay, you can’t just borrow money for free. You owe the bank a percentage to borrow that money. So firstly, it’s probably good to know how mortgage relates or how mortgage interest is calculated as it relates to how your mortgage goes. So interest is calculated based on outstanding mortgage balance, times one month’s worth. So one 12th of the interest rate percentage every month. That’s why every month, you actually end up paying, even though your total dollars are the same, you end up paying a little bit more principal and a little bit less interest every single month. And that’s why at the beginning of your loan, it takes a long time to kind of make a dent into that principle. You’re paying a lot of interest.
Josh Robb:
That’s a lot of interest.
Austin Wilson:
But at the end, you’re flying through it. So that’s kind of how that works. And it’s also good to know that as the economic cycle goes, the interest rates typically move, here in the United States as we’re sitting. So when things are going really, really well, typically as inflation creeps up, interest rates rise to kind of slow down the growth to keep it from getting out of hand. And then on the other side, as things slow down economically, interest rates fall to kind of make borrowing and lending easier to encourage growth. So that’s kind of the way it works. So as rates go down, you can lock in your interest rate lower than where it was set up before. And you can save money based on that interest rate spread. But as rates start to rise, you could also consider refinancing before they go higher, if your rate is higher than where it is now. So where are we now, really stinking low, mortgage rates are at all time low.
Josh Robb:
Yes. We’re seeing historic lows on interest rates. And like you said, the big key, if you’re looking at the interest rate is, “Is my interest rate I locked in, higher than what they’re currently offering? If yes, then I should at least consider the refinancing option.”
Austin Wilson:
If you talk to your bank or your loan provider, whatever, they can tell you that exact breakeven point, because maybe if it’s an eighth of a percent, it might not be worth it.
Josh Robb:
But if I’m paying three and a half and the rates got moved down to 3%, that half a percent, 0.5%, it’s a lot.
Austin Wilson:
So these are things to consider as you talk with the professional about that. But an example that I ran here for a rate savings is so the same $200,000 loan, Josh, you bought a house, you took out a 30 year mortgage. Fixed rate, 30 year mortgage, your interest rate, now this was 10 years ago, your interest rate was 5%.
Josh Robb:
5%, locked it in.
Austin Wilson:
So then you look to refinance. And you refinance … You’re 10 years into this loan, so you refinance for 20 more years, but today’s rates are lower. 20 year fixed rate mortgage or whatever, you got 3% is your mortgage rate on that. So your 2% less in interest rate, what do you think you would save in terms of interest over the life of the loan?
Josh Robb:
Well, so just from understanding that, every month, like you said, I’m paying a little less interest is being compounded and charged. So my monthly payments are going to be a little lower because it’s a smaller loan value because I’m 10 years into it. But in general, that’s going to be not as big of a deal as like you said, for the next 20 years, I’m compounding that interest savings. So my guess is it’s going to be a good chunk of change.
Austin Wilson:
In fact, you’re right. It is $41,000 saved just from 2% interest difference … When you start that loan, you’re 10 years into that $200,000 loan, you still owe $163,000 almost on it. Your term is the same. You’ve not cut any time off of the loan. Your payment goes down by about $171. But that inch, that really adds up, that interest savings, $41,000 over the next 20 years.
Josh Robb:
So that’s a good chunk of money that you’re saving.
Austin Wilson:
It is a huge. So that is one way to save. So you can save on interest itself. And another way that you can save is actually by the length of the loan. So that’s another way to save as you look to refinance, because like we said, you’re charged just based on the months worth of the rate of your balance. So if that term is shorter, you’re going to pay less in interest. And oftentimes, it’s huge. But this also means, as a homeowner, you build equity faster. So that’s a very, very good thing here. And due to the lender taking on less risk, because the loan is shorter, it means they’re going to get paid sooner. Shorter term rates are lower than longer term rates. So that’s awesome. So here’s another example. Josh, using you as the example again here-
Josh Robb:
$200,000 house.
Austin Wilson:
You bought a $200,000 house, 30 year mortgage, 5%, locked in 10 years ago. So you have 20 years left in the loan. Suppose you have the same interest rate. You can only still get a 5% interest mortgage. It’s really not too realistic in today’s world. But suppose you still only get a 5% interest rate, but you think you can pay off that loan 10 years sooner than anticipated. So you’re essentially turning that 20 year loan into or that 30 year loan into a 20 year loan. So you’ve got 20 years left. If you’re going to say, “I’m going to pay it off in 10.” But your interest rate is the same. Just the time difference, the interest rate being the same, but just the time difference saves you $50,600 in interest.
Josh Robb:
Now in doing that though, since it’s the same interest rate, but I cut the rate shorter, I’m probably paying a little more in my monthly cost.
Austin Wilson:
What everyone has to consider when they’re looking at refinancing is especially when you start talking term differences. So when you’re talking rate differences, if the terms are all equal and everything, if you’re just going down in rate, your payment per month is going to go down. But when you start compressing that loan, your rate … Even if your rates is the same hypothetically like this, you’re going to be paying substantially more a month. So in this example, your actual payment goes up by about $650 a month. So when you’re looking at refinancing-
Josh Robb:
Make sure you can afford that.
Austin Wilson:
Make sure you can afford on a cashflow basis the payment change. Oftentimes your payment’s a little higher, but do keep in mind, when you’re talking about these sort of things, you don’t just have to think you’re locked in at 15 or 30 years because your mortgage person can probably do about anything. But generally speaking, people look at 10 years and 20 years all the time, whatever works, 15 and 30 are just the most common. So don’t feel confined by that. So where it gets really fun is, so you’ve got a little extra cash in your pocket and you say, “I want to get my best bang for my buck.” My best bang for my buck, and what’s probably more realistic today, considering where rates are, is to combine both. So what’s the impact of both.
So Josh, $200,000 loan, 30 year mortgage, 5% locked in, the same thing. Got 20 years left here. 10 years into that loan. You still owe $162,000. Suppose you can do that at 3% instead of five, just like the first example. But also suppose you can pay that 20 years remaining off in 10, just like the second example, you can do both.
Josh Robb:
So I shortened the loan and I’m getting lower interest rate.
Austin Wilson:
Correct. So you save $69,000 of interest.
Josh Robb:
Wow. So that’s a big deal. And that’s over 40% of the loan when I make that refinance. Because loan is $162,000.
Austin Wilson:
Now remember, keep in mind that your payment is going to go up, but it’s actually because your rate went down, even though the loan is shorter, it’s not up as much as it was with just the shortening of the loan, because your rate went down as well to offset a good chunk of that. So you are paying about $500 more a month, but $69,000 on what was $180,000 loan. That’s great. Those are some just examples of some ways that considering refinancing can really help you.
Josh Robb:
That’s great. In explain those, we kind of went through those scenarios. The idea is, everybody’s situation is different. Where you’re at with your mortgage and your equity that you have in the home will determine whether it makes sense. But the cool thing is, that’s what the bankers are there for. You can ask them and they’ll give you a rundown on, “Does it make sense or not?” And so it doesn’t cost anything to go out and have them kind of give you a comparison of where you’re currently at. So if you’re just considering it, start talking to a couple of bankers, ask around to say, “What are the rates? What could you offer me? What’s the value I could see?” And we’re going to get through in a minute about what are some of the other uses for that money. But the idea is it doesn’t cost anything to ask. So if you’re considering it, just check it out. See what the banks have to say.
Austin Wilson:
And before you even do that, you can check out … I pulled and ran all these numbers, these are high level numbers, but I had a free calculator online. And we’re not sponsored at any way by this, but it was calculator.net/refinance-calculator. And we’ll throw that in the show notes.
Josh Robb:
Because you probably don’t remember what he just said. I know I don’t.
Austin Wilson:
Throw it in show notes, you can click on it. You can put in original loan amount, how many years in or months in or whatever you are, interest rates and then new and old, and it’ll show the exact difference of where that stuff comes. It’s probably not going to be as exact as if you talked to the bank who has your mortgage. But it’ll get you in the ballpark.
[16:27] – Dad Joke of the Week
Josh Robb:
Definitely. Let’s take a break. Let’s do the dad joke of the week.
Austin Wilson:
Dad, joke of the week Josh. I have a good one for you.
Josh Robb:
Alright. I’m ready.
Austin Wilson:
Can you have four kids.
Josh Robb:
I have four kids.
Austin Wilson:
You know about food.
Josh Robb:
I’ve heard about food.
Austin Wilson:
So what did the fast tomato say to the slow tomato?
Josh Robb:
I have a good guess on that.
Austin Wilson:
What is it?
Josh Robb:
I’m going to say catch-up.
Austin Wilson:
Yeah, that’s actually right.
Josh Robb:
Got it.
Austin Wilson:
He’s probably heard that before. Josh and dad jokes-
Josh Robb:
Tomato jokes almost always end in the word catch-up. I’m just going to be honest with you. If you hear a joke and the tomato is in it, it’s probably ketchup.
Austin Wilson:
Okay. So here’s a question. Do you pronounce the word-
Josh Robb:
Ketchup? Ketchup?
Austin Wilson:
How do you pronounce it? I think I’ve heard you say catch-up.
Josh Robb:
Catch-up. As in like way behind.
Austin Wilson:
Actually catch up. Is that how you say it? Was it wrong?
Josh Robb:
I think when I’m just saying it, it’s probably more of a, “Hey can I have some ketchup?”
Austin Wilson:
Catch up.
Josh Robb:
Ketchup.
Austin Wilson:
I say ketchup.
Josh Robb:
Ketchup.
Austin Wilson:
Yeah.
Josh Robb:
I don’t know. Or like wash and wash. So all those fun ones.
Austin Wilson:
Oh that’s just wrong. There is no R in … I had grandparents wash.
Josh Robb:
They wash your clothes.
[17:39] – Watch Your Payment Amount
Austin Wilson:
I can’t do it. Okay. So back to mortgage refinancing. So let’s kind of break down some overall thoughts before we get into some other more nitty gritty things. So overall, watch your payment amount. So as we pointed out in a couple of those examples, you can increase your payment pretty drastically actually, if you think about refinancing. So make sure your cashflow can afford that. It’s easy to bite off more than you can chew and your bank may, if they don’t know the rest of your financial situation, which they should have a decent idea once you provide the paperwork, but they may approve you more when you would be comfortable for it if you don’t know that monthly amount.
Josh Robb:
So just keep that in mind is if you’re consistently paying, in those examples, I think it was like just over a thousand dollars a month. And then in that last example, it was $1500. So an extra $500 a month, that adds up. So make sure you can afford any increase in payments that could result from a refinance.
Austin Wilson:
And that specifically comes when you start talking about shortening the term.
Josh Robb:
Shortening it.
Austin Wilson:
And also so other things equal if you’ve got a mortgage years ago, refinancing today because we’re in a very low rate world, could likely save you money per month because rates are lower. So that’s a really good thing. This could be particularly lucrative if you start thinking about doing other things that we’ll talk about with some of the cash and stuff like that. And also if you just want to keep your payment the same, so this is something your bank can do for you too, so suppose you have a thousand dollar mortgage a month, but you got that at 5%. Rates are three now, or two and a half or whatever you want to do, whatever your bank says you can do, suppose you want to keep paying a thousand dollars a month, but get the lows lower rates, they’ll back into that timeline that you need to have.
Josh Robb:
So maybe it’s not 20 years left, it’s 16 years or whatever it is.
[19:18] – Adjustable Rate Mortgage
Austin Wilson:
Exactly. So that’s really, really a cool thing as well. So one thing that some people like to do when interest rates are moving is actually convert their loans from different types of loans. So Josh, sometimes banks charge you an arm and leg.
Josh Robb:
Yes. And the arm and the leg, the arm part is more what they grab. ARM is what Austin is talking about, is adjustable rate mortgage. And it sounds just like those words is the rate adjust. And so an ARM is in a sense they’re starting out at an interest rate, usually what the current interest rate is or sometimes lower. And then they’ll say, “Okay, for five years, you’ll pay X amount. And then we’re going to move it up based on what the new rate is.” And so they offer those incentive and depending on where the interest rate is, some people like to use those type of options or if they don’t think they’re going to be in the house for 30 years, sometimes you can get a lower interest rate.
The downside for those is if the interest rates rise significantly and you’re stuck with the house, you’re going to be stuck with a higher interest payment, which means a higher monthly payment. And then opposed that is a fixed mortgage, which is the one that we suggest for most people is they set a rate and it stays the same for those 30 years or however long your term is for your mortgage. Fixed rates are great because you know what you’re going to pay every month, for as long as you have that mortgage. Now people do, like you said, adjust between the two. And so they may start with an ARM and say, “You know what? I have an adjustable rate mortgage. It’s at a low rate. It’s going to be adjusting upward because interest rates are going up.” Not now, but if in the future for it to do go back up, this is when you’d see that scenario. And you’d say, “Okay, I’m paying 3% now. Interest rates are actually closer to five. My rate’s about ready to adjust. It’s just periodically or whatever the schedule they set it up. I don’t want it to adjust to five. I’m going to actually convert it over to a fixed rate.” And so then you should do a refinance over to a fixed rate to save you from locking in what’s going to be a higher rate.
Austin Wilson:
And with an ARM, that that rate will not just go up once, it will continue to move as interest rates move.
Josh Robb:
Do you think when they talk about the term of an ARM, they call it an arm’s length. I don’t know. I’m just wondering.
Austin Wilson:
Do you have an arms length agreement at the beginning? That’s right. So it’s conversely. You are in an economic boom. Things are great. But the Fed’s been on interest rates kind of clamping them down. But then, things slow down. Things slow down quickly. Maybe a pandemic happens. It could happen. I don’t know.
Josh Robb:
Unknown virus that shows up from somewhere.
Austin Wilson:
Unknown virus could happen. So then interest rates fall. So conversely to what you had just mentioned, what you could then do is actually refinance the other way-
Josh Robb:
To an ARM.
Austin Wilson:
To go from a fixed rate mortgage to an ARM. So that as rates fall, your interest rate also falls with it as well. The issue with this kind of play that we’re talking about here is that you’ve really got to be on it with interest rates. And you’re going to be doing a lot of refinancing, potentially.
Josh Robb:
With cost of all, which we’ll get to.
Austin Wilson:
Which is why generally speaking, we would advise it’s not the same for everyone, but generally speaking, most people would be safer with a fixed rate.
Josh Robb:
The safer play is a fixed rate interest because you know what you’re going to pay and you’re locking in. You remove that uncertainty. And so that’s why again, from a financial perspective, the conservative, the safe route usually is the best route in that you eliminate those unknowns as much as possible.
[22:40] – Home Equity Cash Out
Austin Wilson:
So another use of refinancing sometimes is because people use their homes equity, so that’s the portion of the actual home that you own, to take out some cash at a really favorable interest rate or terms and use it for something else. So this could be an addition to their home. This could be a remodel, a new car, to pay off other high interest rate debt. These are some options. Now this could be a good thing. This could be a bad thing, depending on how you do it. So firstly, if you’re using this home equity cash out, when you refinance. So really that saying you have a $200,000 loan or a home, but you refinance and things have gotten great. So you own more of your home than you did when you originally bought it or whatever. So then you take out a good chunk of that equity that you own, in cash. So then you actually own less of your home, but it’s at a really favorable rate because it’s at mortgage rates. So that’s really what we’re doing there.
Josh Robb:
So let’s explain it. So going back to your $200,000 house, if I’ve been paying my debt down and let’s say now I only owe a $100,000, so I have equity of $100,000. And then I owe the bank a $100,000. If I refinance and say, “Okay, now I want to get $20,000 of equity out. I’ll owe the bank 120 and then I’ll have 80,000 of equity, but I get $20,000 cash.” That’s just flat value rate. So then now I have a mortgage for $120,000 because I refinanced. But I have $20,000 cash-
Austin Wilson:
Do whatever you want with it.
Josh Robb:
To do anything I want. Now we’re suggesting, and what you were mentioning is the best thing to do with that money is something that adds value or grows or appreciates. So an improvement on your house is a great thing for that. What are some things that you could do with your house, but maybe aren’t quite as beneficial?
Austin Wilson:
I mean, as you take that cash out. Obviously things that go up in value, things that add value to your home, we’re saying that’s good. Things that are not so great, maybe you have a really expensive house and you take out a $100,000, $200,000, I don’t know how big people’s houses are. If you bought something like really frivolous, like a Ferrari, like we took a vacation, not saying vacations are bad, I love vacation. But these things that you’re taking on debt and really pushing back your mortgage finish substantially, if you’re doing things like that, that’s really not a value added to your financial life. So especially for the car thing, if you’re going to go out, if you’re going to take a home equity loan and buy a brand new car, brand new [inaudible 00:25:18], you’re incurring what’s called depreciation very quickly. And that $20,000, you can’t buy a car for $20,000. And that $40,000 that you took to go buy your brand new car, you go buy your $40,000 car. And two weeks later, it’s worth 35. And then at the end of the year, it’s worth 30, and you’ve paid interest on that whole thing.
Josh Robb:
And on top of that, most cases you’re probably having a 20 or 30 year loan, who owns a car for 20 or 30 years? Not many people.
Austin Wilson:
Yeah that’s true.
Josh Robb:
You’re still paying that debt on something you don’t … So go back to your vacation. So once you’re done with that vacation, you’re going to pay for that vacation for the remaining of your mortgage, that you refinance to get the cash out. So just a way of thinking about it is when you get that money in hand, it’s not free money. You’re paying interest because you’re borrowed it from the bank over the life of that loan, which is the mortgage length, so 20, 30, 15, whatever your length is. But you’re paying interest on whatever you use it for, so make sure you spend wisely on that money.
Austin Wilson:
Exactly. And you can use, it probably would maybe worth considering, depending on where you’re at in life too, you could use that to pay off something like student loans, to pay off credit card debt would be great probably use of your money.
Josh Robb:
If your debt is higher than the mortgage rate you’re paying, yeah you’re netting better because that is interest rate you’re swapping out at a lower rate.
Austin Wilson:
So those are some more good uses of it as well. Another justification that a lot of people have used for this home equity cash out is that, and then they can really use it for whatever they want, is that mortgage interest is tax deductible.
Josh Robb:
Up to a certain amount.
[27:14] – Property Tax
Austin Wilson:
Up to $750,000 mortgage, I think. In 2017 though, that really kind of flipped it. It used to be even more lucrative to be able to do this kind of thing. But since most people now are claiming the standard deduction, which is quite high, most people don’t even claim their mortgage interest because it doesn’t matter. Now some people do and that could be an option for them. So anyway, that’s something to consider, but Josh talk about property taxes and the impact to refinance.
Josh Robb:
Yes. So property tax, obviously, if you own a home or bank owns a home that you’re living in and you’re not renting. If you own the home, you pay property tax, the owner of the home or the property pays property tax. Now that property tax is based on the value of your property. It’s crazy right. And they periodically will send somebody out to do a survey and reevaluate your property’s value. And so you will owe more as your property value increases. So property tax can actually go up in cost. In most of the time, if I’m getting a refinance, they’re going to reappraise my home.
Austin Wilson:
Exactly.
Josh Robb:
Because the bank wants to know what’s it worth when they’re doing this refinance. So if I’m getting refinance done, and the bank says, “Okay, now we know how much more your home’s worth.” Guess who else finds out about that?
Austin Wilson:
The government.
Josh Robb:
The government knows now. And so your property taxes could go up. It could go down too, but probably not.
Austin Wilson:
Generally speaking, it’s not perfect. But generally speaking, property value increases over time. Now more or less, depending on location, depending on property market, depending on what area, part of the economic cycle you’re in. But generally speaking over long periods, your property value will increase. So this is going to involve a couple of things, probably. This is going to involve either a higher tax check, property tax check that you’re going to send in twice a year or whatever that is. Or you’re going to have higher, if your bank does that for you. So if you’re using, let’s call it escrow where the banks are paying and accruing those taxes and insurance or whatever for you. Well, if that insurance piece goes up … Or not the insurance piece, if the tax piece goes up, your mortgage payment’s going to go up too. So those are things to consider and that’s going to be added to your monthly payment. So property taxes is another thing to consider because you’re going to get your house looked at.
[29:07] – Costs in Refinancing
So you know how we’ve said before, that there is no free lunch, even though we both we love food. We love lunch, we really love lunch when lunch is free. But when it comes to refinancing, there’s no free lunch.
Josh Robb:
No free lunch.
Austin Wilson:
So first of all, it costs money to refinance. So go kind of break down a couple of components of that.
Josh Robb:
So first is closing costs. So similar to when you first bought your home is there’s costs involved in doing this whole process. People spend hours working on creating these documents that you signed, a lot paperwork.
Austin Wilson:
It’s a lot of paperwork.
Josh Robb:
And so the closing costs are just the cost you pay for everybody involved who complete this transaction. So all the bankers and all the fun stuff. And so the closing cost, you can do two things with them. One, you can roll that into part of the loan. So I think Austin, around this area, it’s like $2,500 for closing cost, give or take. Somewhere around there. It’s a significant chunk of change, but it’s not crazy. And so you could say, “Okay, you know what? I’m just going to add $2,500 to the loan cost, roll it in there. I don’t have to pay anything out of pocket. But what I’m going to end up doing is paying interest on that 2,500 throughout the whole loan.” But if you don’t have cash on hand, it’s an option.
Austin Wilson:
Yeah. And in today’s world, the potential for you saving more money than that in the long run, it’s pretty high in today’s low rate environment.
Josh Robb:
So then the other option is obviously paying that closing costs upfront. So you write a check and say, “Here’s to pay the bill for all the work you did, to create this new mortgage for me.” And so you could just pay it up front. The benefit there obviously is then it’s not rolled into your mortgage. You have a lower mortgage, and you’re not paying interest on that. It’s a one time cost.
Austin Wilson:
Another thing is points, and we’re not going to hammer this home, but just to think about. There’s two kinds of points that can be used and talked about by your mortgage originator, who’s putting all that together, the lender, and those are origination points, which is really a loan compensation for the officers who are putting that together. It’s like one time upfront and you can get those points somewhere in the neighborhood of probably about 1% of a loan value. Another thing is discount points, which is where you are essentially prepaying for a lower interest rate over the rest of the loan. So you can get between one and three points, which is about 0.25% of mortgage interest per point. And you can pay that upfront as well. And those are not given and they’re different for every single situation, for every single person, for every single loan and bank. Those are some things to think about as well. As well as appraisal cost, title search cost, application fees, they seem very small, but all this put together kind of adds up.
Josh Robb:
They add up.
Austin Wilson:
And at the end of the day, you end up with two or three plus thousand dollars depending on how much the house is. And then you have to pay for that at some point.
Josh Robb:
In your opinion Austin, and kind of talking around with bankers and stuff, it seems like you can get a good feel of what your total costs would be. It’s not like these are all hidden. They’re very transparent and say, “Okay, if you’re going to do a refinance with our bank, here’s what to expect.” Now they may not know the exact, but they can give you a ballpark of, “Here’s exactly what we charge for these pieces. And then here’s a percentage or a round number of about where you’ll see it vary.” You’ll know going in what to expect. And so just if you talking with people, we’re kind of giving you a high level what these are. They’ll be able to explain and tell you the exact cost.
Austin Wilson:
And one of the ways that this whole discussion topic came up is that I’m actually going through the process of refinancing my home right now. So my wife and I were like … Obviously I look at interest rates all the time, she’s not so interested in that.
Josh Robb:
Is that not one of her hobbies?
[33:02] – Refinancing at Different Stages of Life
Austin Wilson:
She’s not like, “Hmm, I wonder what the Fed’s going to do this month.” But yeah, so I’m looking at interest rates all the time. I’m like, “Wow, they’re low. And they’re going to be low for a while. But I wonder based on …” We bought our house a few years ago, “Based on all of that, does it make sense to refinance?” We ran some numbers and talked to the bank, so we’re going through the process to do that ourselves. And I’m like, “Hey, other people are probably in the same situation.” So yeah, this is kind of fresh and it kind of hits home for us. But something that does not hit home for me is something that you know a little bit more about and that is how refinancing can impact people at different stages in their lives. So obviously I can look at it more from the young side, younger perspective and how someone at the front end of their mortgage kind of feels about refinancing. And we’ve kind of hit on some of those points, but how can this impact retirees and some people on that end of the spectrum?
Josh Robb:
So like you said, for young people that are refinancing, the duration isn’t as big of a deal. Let’s say I bought a house and then three, four years later, the rates dropped and I could get a better … I’m still going to get a 25, 30 year loan. I’m still getting a long loan. So for retirees or people who are close to retirement, they have to be more careful because they got to keep in mind that as they’re heading into retirement, most retirees are uncomfortable with debt. Because at that point, I no longer have a steady income coming in to supplement those debt payments. I’m now responding to the pressure of, “Now I’m providing all things from my investments.” Or my income or whatever, social security, whatever it is, that causes stress.
And so we always encourage retirees or people heading to retirement, get rid of as much debt as possible. You don’t want debt in retirement. So if you’re refinancing close to retirement, you’re adding debt, you’re adding a mortgage or an extended mortgage that may cross into or be a part of your early retirement years. Not saying it’s bad. And we have retirees that do that. They just need to understand that debt will be here for this many years, and there’s an obligation. Now again, going back to your example, let’s say you have a $200,000 house and you’re heading close to retirement and there’s only maybe five years left, if you’re refinancing and you’re just pulling some equity out to maybe fix up the home to make sure it’s ready for retirement. You may only be adding a little bit to that or changing it slightly. That’s not a big deal.
It’s just you need to be aware, especially retirees of, “What debt burden am I adding to my overall financial picture and how will that not only impact my finances, but psychologically, how do I feel knowing that I have an obligation that I’m responsible for?” And then if the market’s drop, and all my portfolios go down in value, that debt burden may become more stressful for me than I realized.” And so again, it’s not that one or other is bad and there’s things like reverse mortgage and stuff, we can do a whole other episode on, that retirees have actually better access to. You can’t actually do until you’re a certain age, where you are getting equity out of a home. But again, that’s a whole other episode. But just straight refinancing, most of the time, you’re either keeping the same duration or extending it because you’re pulling equity out, for retirees it could be stressful. Or an initial least to consider.
[35:50] – Is Now a Good Time to Refinance?
Austin Wilson:
So bring it home. Josh, based on your experience, based on your many, many, many years of life.
Josh Robb:
Many years. I’m really old.
Austin Wilson:
Because you’re really old. Is now a good time to refinance?
Josh Robb:
It depends.
Austin Wilson:
Wow.
Josh Robb:
Don’t I always answer those questions like that.
Austin Wilson:
I think you do. But I kind of expect it now.
Josh Robb:
But everybody’s situation is different, but it really is true. Is now a good time to refinance? Well, do you need some equity? Do you need some of that equity in cash for a remodel or anything like that? Are your interest rates significantly higher on your mortgage than what you’re currently in the market? Or is there something that happened in your life that you need to readjust the terms of your mortgage? So if any of those things apply then yeah, probably now’s a good time to at least look into a refinance.
If you’re just saying, “You know what? I bought a house earlier this year and man look at these deals.” Well, it just may not pan out what you’re going to pay upfront for what you’re going to get. It may not be worth it. Like you said, saving 0.05% on interest rate may not get you anywhere.
Austin Wilson:
It’s a lot of hassle for that too. So I guess in summary, it is probably worthwhile, especially if you’ve had your mortgage for a little while, to start looking at these things. But this is where talking to your bank, who holds the mortgage or whatever. They may not own it. They might have sold it.
Josh Robb:
They sold it.
Austin Wilson:
That’s likely actually the case. So talk to your bank, talk to your financial advisor. These kinds of people, they can look at the grand scheme of things with the big picture-
Josh Robb:
Run some numbers.
Austin Wilson:
Run some numbers and tell you if it’s worthwhile, if it’s not, what your options are. So that’s what our advice would be is talk to someone who knows what they’re talking about, because it can definitely pay off as we pointed some of those numbers out, a couple percent does not seem like much, but a couple of percent is a lot on a mortgage.
Josh Robb:
Talk about compounding. A couple percent over 20, 30 years, that adds up.
Austin Wilson:
And so as we’ve talked about compound interest being your best friend, compound interest in debt is the opposite. So this is why it helps.
Josh Robb:
So that’s why you’re paying down.
Austin Wilson:
So Josh, how can people help us to just grow this podcast? Continue to help people?
Josh Robb:
Yeah, so like always we say, subscribe to us so you get all the updates. Every Thursday, we’re pushing out a new podcast. We want to make sure you see that and hear that. Leave a review on Apple Podcasts. That’s the best way for us to rank, the ranking is important so that more people find our podcast and can be helped by it. And then also we love ideas. If you have an idea for a podcast, send us an email at hello@theinvesteddads.com. There’s a link on our website, theinvesteddads.com, where you can send it directly from there. Also, if you know somebody who may be thinking about a refinance or you think somebody has been talking about it, please share this episode with them. It’d be great. Hopefully it’ll help them out.
Austin Wilson:
All right, well until next Thursday, Josh and I say, sayonara.
Josh Robb:
See you later. Talk to you later.
Austin Wilson:
Bye.
Outro:
Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future, doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode.
Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management, all opinions expressed by Josh, Austin or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only, and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.
