Should You Refinance Your Mortgage?


Should you refinance
your mortgage? That’s today’s show. Let’s get into it. Hey, everybody. I’m– I was going to say I’m
Clayton Morris but I’m not. I’m Natali Morris and
this is Clayton Morris. You’re listening to the
Investing in Real Estate show with Clayton
and Natali Morris. Clayton Morris is a little
bit under the weather. Yeah, I’m sick as a
dog, so maybe it’s– He’s got the Kathleen
Turner voice. So you do not want to be me. I know you thought
you were going to be me by using my name, but
you do not want to be me right. That’s going to get me
nowhere at this point. Today, we want to talk about how
to calculate whether or not you should refinance your mortgage. Now this applies to
anyone who owns a home and has a primary home
mortgage, but also anyone who is an investor
and has a mortgage and they want to
rethink that mortgage. On your rental property. Right. As we’re speaking, mortgage
rates are going down. So that gets people
thinking, oh, could I get a better mortgage? We just saw Wall Street Journal
cover story this morning about interest rates helping out
the housing market at an eight month low. So now might be
the time to strike if you want to go out there
and get that refinancing. But we want this
video to be evergreen, so you could be listening
to it at a time when mortgage rates are increasing. In which case, we
just want to make sure that you know how to
do this calculation. It’s pretty simple calculation
but I think a lot of people sort of think in terms
of just monthly payment. Like, OK, this loan can
save me so much per month and so I want it. Which sounds like a
great idea, but you have to remember that when
you’re refinancing your loan, it’s the word, the
part of it that’s re, doesn’t really apply because
you’re not redoing one loan. You’re getting a
whole new product. You’re going a whole new loan. So you’re just taking one
financial product for another. Right? Right. A lot of times people do
it with different banks, although a lot of times
your own bank could do it. And most of the time
they will want to. But you have to
think of it like, OK, let’s pretend bank A
gave me a mortgage at 5%, but now rates are around 3.5%. So bank B is going to
offer to pay off bank A, so you no longer have a
relationship with bank A and now be your mortgage lender,
bank B, on a new product, right. A lot of times that’s
great because they’re going to look at what’s left on
the loan from bank A and say, OK, you have $100,000. I’ll pay off bank A $100,000. They’re out of your life. They don’t exist. Right. Right. Your new relationship is
$100,000 mortgage with bank B, right. But what you want
to look at is what’s your bottom line because,
most of the time you don’t owe bank A just $100,000. You owe them $100,000 and
maybe some fees, maybe an escrow account, whatever. Right. So they’re going to look
at that total payoff, which is you owe them let’s say 102. Right. Right, and then they’re going
to say, now you work for us. Now your relationship,
I own you. Well, that’s why we wrote– Right. And that’s why we
wrote our book, “How to Pay Off Your
Mortgage in 5 Years.” Shameless plug, link below. But we’ve done this strategy a
number of times with our home equity lines and using
one financial product to say goodbye to the
other financial product. Right, but we’re not
talking about home equity line of credit at all today. So take that and– Right. –put it away. Read the book. But really we’re talking
about bank A and bank B. Don’t digress. I’ll go back to
my cold medicine. You take up your box of tissues. Let the big boys talk. OK. So now we’re talking– So when is it– –about bank B. Let me ask you this question. No, please let me
finish the point. OK. Because I think if someone’s
trying to follow this, and you go on a tangent– I’m going to– OK. But go ahead. OK. Where was I? The new product is with bank B. Right. And now you’re $100,000 loan
is instead of 5%, it’s at 3.5%. That means your monthly
payment is now lower. But most likely you’ve
got a brand new mortgage that is now 30 years. What if you were five years into
your relationship with bank A? Well now your mortgage
is 35 years, right. So we talk about in our book
how you’re number two, your two main enemies– Interest. –are– Interest and time. –interest and time. So you’re now winning
the interest game, but you’re losing the time game. You just added– Right. –five years back to your loan. Now is it worth it? Maybe, right? Because you do want to pay
the lowest amount of money for money. Right? Question. Yeah. So now my question is. Now you may ask a question. When, Natali, is it worth
it to refinance your home? When is it worth it? OK. So a general rule
of thumb is if you can save 0.75 of a
percentage point, or between that and higher,
then it will work out. Right? Then it’s– So between– –worth doing. So between 0.75 and 1% per month
in the APR, then it’s worth it. So let’s say you have
a 4% interest rate and the bank is offering
you 2.25%, do it. Right? But here are some caveats. You want to make sure that
you’re doing it in a home that you’re going to
stay in long enough to recoup the closing costs. Because bank B is going
to say to you, sure, I’ll take on that
new loan, right. You can now owe me
$100,000 at 3.25%, right. Awesome. So let’s pretend– And I
didn’t do a proper amortization schedule on this,
but let’s pretend you owed bank A $1,500 a month. That’s your mortgage payment. Mhm. OK but you refinanced
with bank B and your new mortgage payment
is 12 50, $1,250 a month. So what are you
saving every month? What’s 1,500 minus 1,250 is 250. 250, right. OK, very good, honey. So you’re saving $250 a month. That feels great, right? But don’t be misled– But– –by that monthly payment. But in order to get bank B to
do all the work of paying off bank A and now doing all
the paperwork to become your new mortgage
company, they’re going to have some
closing costs, right. Let’s say the closing costs
around $2,500 a month. That’s cheap, but
not overly cheap. So you take that $2,500– Not a month, sorry. Those are the closing costs. You take those total closing
costs, if it’s $5,000, use that. But in our example it’s $2,500. So take $2,500, divide it
by your monthly savings, which is 250, right. And that ends up to
10 months, right. $2,500 divided by your
monthly savings of 250– OK. You will recoup those
closing costs in 10 months. So then that seems like a no
brainer, you should do that, right. Right. Because you know how to tackle
your amortization schedule. You’ve read our book, right? So then, obviously, you
want to save that money. You want to pay less
money for money. But what if you plan
on moving next year and that number is higher? What if it’s going to take
you two years to recover the closing costs
and you want to move next year because, I don’t
know, you’re finishing college. I couldn’t think– Right. –of a good example. So then you shouldn’t do it. So you just have to make sure
I will be in this house long enough to recoup that savings. , Right. So you’ve lowered your
monthly payment, great, but don’t be allured by that
because closing costs can be costly. And a lot of times people
don’t pay attention to those closing costs. And I know in the case of
ours, when we did ours, and it was like what
8,000 or something. It was like it was pretty high. Yeah. But we’re in New Jersey, we
have a lot of different fees. Right. In general, most places
are not like that. Yeah. Unless you’re in one of those
high tax states like we are. But a lot of times you won’t
know what the closing costs are until kind of later in
your discussions with the bank. So really it might put a
halt to your entire process, so it’d be helpful to find out
what those closing costs are going to shape up to. They have to tell
you around what they’re going to be because of
the new Truth in Lending Act. They didn’t always
used to do that. Right. Just make sure. You need that number as much
as you need the new API number. Those two numbers
go hand in hand so that you can calculate
what you’re going to save. Now, of course, our
suggestion to you is to take that
extra $250 a month that you’re used to paying,
and now pay that to principal. So you’re accelerating
the new loan more than you would have
been in the old loan. Right. Right, of course
you want to do that. But there are also
other things that you want to look out for as well,
if you’re going to do this. And we’re not saying
you shouldn’t do it, you just want to be
equipped with the numbers. Right, so, here
are some things you should look out for if
you are going to do this. Yeah, so make sure there not
some additional and extra costs hidden in the loan that
you don’t know about. Of course, the closing
costs are going to be there but let’s just make sure
there’s not some other costs. Go line by line. What is this for $500? What is this for 1,000? These things start
to sneak in there unless you are paying
attention, no one’s going to pay attention for you. Right, you want to make sure
that your new principal balance is pretty stinking close to
your old principal balance. So sometimes the
lender will say, oh, but there’s a few
points tacked on. Like not just the closing
costs, but they’re charging your points. In which case, you’ve just
exchanged $100,000 from bank A to like 110 for bank B. Even
though your interest payment is lower, your new principal
balance is suckier. Don’t do that. Right. Right, you– Yeah. –don’t want to do that because,
in general, you’re just trying so hard to pay down principal. You don’t want to add
to your principal. Number two things look
out for, you never want there to be a
prepayment penalty. Our friend Susan
Lassiter-Lyons likes to say, and she’s the
author of the book, Getting the Money, the
billion dollar woman, she likes to say that if there’s
ever a prepayment penalty, walk away. Because, look, you’re
trying to pay back this loan more quickly. A bank should want to
turn that money around more quickly, as well. So if you’ve signed a 30
year note with somebody and they expect you to pay it
over that 30 years, walk away. Yeah, that sucks. That means that, I don’t know. Well, that also means
that our whole book strategy doesn’t work, right. Right. Our How to Pay Off Your
Mortgage in 5 Years, then that, you know. So the bank is
putting up the risk of loaning this money to you. Most of the time, it’s
very rare that there’s a prepayment
penalty because they want that money to come
back, and if they’re making a good chunk of interest– But for investor
loans, it’s common. So just– Yeah. –make sure you’re ready
for that kind of thing, too. Also, make sure
that this does not affect your title insurance. Most of the time, you’re
going to get new title work on this new
product and that’s fine, but you want ask the question. Just make sure, do I still have
title insurance on owning this? I refer you to the episode
we did on how to take title and what that even means. But it’s good to be aware of. Now here’s a bonus question
I have for you, Clayton. If bank B says to you, sure,
I will offer you a new loan. Our closing costs are $2,500. Can I put that on– Would you like to finance
the closing costs? What would you say? I would say, no. No, you should not
do that, right. Because now you’re
not just paying $2,500 for the closing costs. You’re paying $2,500 plus
the new interest rate, right. So try really hard to pay
closing costs out-of-pocket. So that your principal
balance from bank A to bank B is the same. You’ve just got a
new lot of money with a more favorable
interest rate. But really, really try not to
finance those closing costs because that’s going to cost
you so much more in the end. Don’t do it. But I’ve got a great question,
because so many of you are probably thinking
this right now. What if I’ve built up some
equity in this rental property that I own, right? You bought it for 150,
it’s now worth 200. Or you bought it for
100, it’s now worth 150. Would you want to do
a cash-out refinance, pull some of that equity
out of one property and roll it into
another rental property? So that is an option. The way that works is bank
B will say, oh, your house is worth $200,000 but
you owe bank A 100,000. So how about I loan to you– They usually do 80% or below. So they’d give you,
let’s say 175, right. And so they’ll say,
now you owe us 100,000. You get to keep that 75,000. As cash. As cash, but your new mortgage
is now 175 with bank B. Whereas before it was 100 with bank
A and you had the equity. Now, what we teach in our
Financial Freedom Act Academy and what we like to
tell people is make sure that you’re taking
that equity and using it to buy a performing asset. Don’t take it and buy
a boat for leisure. Right. Don’t take it and buy something
you don’t need, right. Buy a performing asset. So if you were then to
say take that money, you’re financing $75,000
at the new interest rate, but you can take it
and put it in something that makes more than that. Yeah, that makes total sense as
long as you’re smart about it. I think too many times,
people do that and then redo the bathroom. Right. Right, so then they
financed the bathroom. That’s not a performing asset. I’m not saying don’t
redo the bathroom, but you’ve got to look
hard at those numbers and say, OK, I’m taking
this, which was equity, and buying a liability with it. That’s not how you build up,
so just cautious about it. If you’re getting a cash flow
from $1,000 a month on this one property, go grab
another property, right. Now you got another
cash flowing property. So that’s where you
want to use that equity in a cash-out
refinance situation. We’re doing that on one of
our properties right now. It’s common in the
investment world, so if you are thinking
about this strategy, it’s a fantastic way
of being able leverage some of that equity
in your property. All right, that’s today’s show. Thank you so much
for subscribing. If you liked today’s episode,
please give us a good old like. You know, the little
fist with the thumbs up. Please do that, it helps. And leave us a
comment below to let us know if you plan on
doing this strategy as you move forward to build
financial freedom. We’ll see you next
time, everyone.

39 thoughts on “Should You Refinance Your Mortgage?

  • Whats the best investment in your opinion with 40k?? Im in between buying a mobile home park that rents 15 spaces or go all in on a bussiness idea ive had for a while

  • will refi if 1 point or more lower. also do not plan to sell the primary residence at all. additionally will refy only for the time left to pay off the existing loan. if 10 years left, will only refy for 10 years. again, love your dynamic. you were made for each other. even look alike.

  • This video is not too helpful in helping decide the real cost of refinancing. They allude to adding time to your mortgage as possibly a bad thing when you refinance, but how do you figure out if its really bad or not in your particular case? Doesn't it come down to how much total interest you're actually going to pay in both scenarios?

    If you have $100k left on a mortgage at 5% and are looking at refinancing to 3.5% you should compare the TOTAL INTEREST ON THE FIRST LOAN over 30yrs and compare that to TOTAL INTEREST ON THE NEW LOAN + INTEREST PAID SO FAR ON THE FIRST.

    If the new total is less then DO IT! You've saved money AND your monthly mortgage went down!

    But if it's more, you have to figure out if the additional interest you'll end up paying is worth having the lower monthly payment. That may come down to needing the extra cash flow to make ends meet, even though you're paying for it in the end, or maybe you know you can use the extra capital to earn back more than it's costing you. Those would probably be the only 2 cases you should do it when you'll be paying more total interest.

    If you don't plan on staying in the house forever then the considerations would be the same, just figure out how much interest you would have paid by the time you plan to leave (plus closing costs etc of course) in both the refi option and don't refi option.

  • What do you think as a mortgage i should be doing to capitalize on my massive discounts i get from my mortgage company?
    Because from my lender(quicken).
    its tough to get conventional mortgages on such small loan amounts for investment properties

  • As I said in the past, this refi decision is still on my mind, so this helps. I'm just not sure what I should prioritize: saving interest long term (don't refi and perhaps get a heloc to help pay down my 15 yr loan) vs. lowering my DTI by refi-ing to a 30 yr cashout to finance buying rentals. Essentially, I'm deciding between paying down primary home debt I have now to dramatically increase cashflow in 5+years and avoid interest, or acquire assets now so I can pay down more mortgages simultaneously, but end up paying more interest overall.

  • Natali & Clayton your videos are interesting as I'm new to the channel.
    But I don't like refing because of the fact that it's just setting me back to start all over again.

  • Hello Clayton and Natali, quick question. I was actually researching about refinancing and came across something that pretty much said you can only cashout refinance when buying a more expensive property then the previous one. am I confused or is this true ? I was under the impression you can cashout refinance or use Heloc to put down payments on multiple properties no matter the price of the property.

    PS. Thank you haha your videos are very much appreciated you guys are great god bless.

  • Mr. Morris, if I purchase my first rental cash (no mortgage) and have a tenant, should I do a heloc or cash out refi when going for the second? do you have a video regarding how to identify the best decision on this?

  • Good morning Clayton. Thanks for the video. I have been trying to refinance an investment property forever it seems like at this point. No bank wants to touch it because it’s treading on being under water. I’m currently paying 7.5% and if I could refinance this thing it would free up my cash flow tremendously. If you have any recommendations I would appreciate it. Thanks.

  • I have an investment property that I am about to do a cash out refi. Taking those funds to reduce my primary mortgage which although rate is .5 higher, I get rid of MIP. Also by resetting terms, payment is much lower and I gain a ton more in HELOC available from my primary to invest in more properties. Or should I not refi primary and use cash out to buy instead of heloc from my primary? Clayton, would luv to know your thoughts on my strategy?

  • Hi guys, thanks so much for the video! I do find it helpful. I'm 5+ years into my very first home mortgage with a 7/1 ARM and are thinking of refinancing since my original plan to move out within 7 years might not happened.

    I have a question about the equity you mentioned toward the end of the video. It's clear to me we shouldn't use the equity (in your example the 75k) to buy any liability products but can we put that 75k back to the 100k outstanding balance that is now with Bank B?

    Thanks so much for your time!!

  • I own my house i bought it for 274k 5 years today it worth 390k. Never finance the house. My house needs new Ac pool needs to be rebuilt. Is it smart to refinance the house to fix some stuff or just get the buy another home to rent?

  • Thanks again. Great video and advice. I also live in NJ and inspired. I am working to get into rental property investment. Need more education and finding some help along the way.

  • Is it smart to use the equity when refinancing to pay off high interest credit cards. The interest on the credit cards are 20%.

  • I wish you guys would had done a actual example on an average mortgage loan how much money would had saved in interest if refi within 2 years, 5 years, 10 years. Going from 5% to 4%. Or any other number. You guys only considered the monthly payment, and how about refinancing and not resetting to 30 years, maybe the new loan would be for the same time remaining on the old loan, or refinancing on a shorter loan.

  • What if I got a VA loan in June 2019 at 3.9 and can get a streamline VA loan at a possible 2.9% after 6 months. Then use that extra money I'm saving to pay towards a HELOC

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