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Optimal Finance Daily - Financial Independence and Money Advice
3491: [Part 1] Should I Refinance My Mortgage by Scott Rieckens of Playing With Fire on Long-Term Mortgage Planning
00:10:56
Scott Rieckens explains how mortgage refinancing works and why lower interest rates can potentially accelerate the path to financial independence
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- [00:00]
Scott Rickens
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- [01:06]
Scott Rickens
this is optimal Finance Daily Should I refinance my mortgage? Part 1 by Scott Rickens of PlayingWithFire Co Interest rates are low right now, so you've probably heard a lot of people talking about refinancing their home mortgage. While refinancing can save you money, it's not always a slam dunk decision, especially when it comes to financial independence. When used correctly, refinancing a mortgage can be a great choice. When used incorrectly, it could lead you down a slippery slope of never paying off your debt. We'll walk you through when and how to refinance your mortgage. What is Mortgage Refinancing? Mortgage refinancing works by taking out a new mortgage to replace your existing mortgage. Refinancing helps you change your loan terms by changing the length, the interest rate, or the amount of the mortgage. Common Types of Mortgages There are a number of different types of mortgages. Before jumping into refinancing, it's important to be familiar with the different options so you know what's available to you. Here's a quick overview of the common mortgages you'll see. Conventional Mortgages Conforming these are mortgages that aren't backed by a government agency. Conventional mortgages can either be conforming or non conforming. A conforming loan means that it meets the criteria set forth by Fannie Mae or Freddie Mac, two government sponsored agencies. Conventional Mortgages Non Conforming Just like conforming conventional mortgages, these loans aren't backed by a government agency. The difference is that they don't meet all of the criteria required to be a conforming loan. A common type of non conforming loan is a jumbo loan. These loans have limits that are higher than what you'll find with a conforming conventional loan and government insured mortgages. The government isn't in the business of making home loans, but they do insure mortgages under certain programs. The most common government insured mortgages are FHA loans, USDA loans for rural areas, and VA loans for members of the US Military. There are also two other loan types you'll fixed rate and adjustable rate mortgages. A fixed interest rate means that your interest rate remains the same during the entire life of your loan. For example, a 30 year fixed mortgage means you'll have the same fixed mortgage rate over the entire 30 year loan. A variable interest rate, also known as an adjustable rate mortgage or arm, means that your interest rate will adjust periodically. A common adjustable rate mortgage that you'll See offered is a 51 arm. With this type of mortgage, you have a fixed rate for the first five years, followed by a mortgage rate that adjusts annually every year after that. When should you refinance your mortgage? There are a lot of reasons why people decide to refinance their mortgage, but not all of them make sense for someone on their path to fi. Refinance to a lower interest Rate when it comes to refinancing a mortgage, a primary driver for a lot of people is saving money. When you refinance to a lower interest rate, you not only lower your monthly payment, but you also lower the total amount of interest you pay over the life of the loan. For example, let's say you have $100,000 mortgage at 4% with 30 years remaining. Your monthly payment, principal and interest only is $477. If you stick with that loan for 30 years, making the required monthly payments, you'll pay $72,008 in interest. Now what if you can refinance that loan to a 3% interest rate, keeping all the other factors the same? Your payment drops to $421 per month, freeing up an extra $56 of cash flow per month. Not only that, but the total interest you Pay drops to $51,912. You save over 20 grand in interest by refinancing it, and because you're on the path to fire, you're not going to spend that extra $56 per month. You'll probably invest it using an estimated annual return of 7% per year. That $56 per month will grow to $63,477 over 30 years while refinancing to lower your interest rate can be incredibly helpful on your path defy. It's important to also weigh the fees that lenders charge to refinance. You'll probably be charged appraisal and origination fees, which can offset the savings that you're getting from decreasing your interest rate. When shopping for a loan, crunch the numbers and weigh the cost of the fees against the savings. Change to a Fixed or ARM when you first signed your mortgage, you either received a fixed or variable interest rate. Refinancing can help someone switch from a variable rate to a fixed rate or from a fixed rate to a variable rate. What are the benefits of switching from ARM to fixed when interest rates are low? Someone who has a variable rate loan may want to refinance to lock in a low fixed rate for the remainder of their loan. For example, if you're four years into a 5:1 arm, you might be worried about your interest rate going up in future years as you switch to the adjustable rate. Refinancing to a low fixed rate now can lock in a low rate for the remainder of your mortgage. From fixed to arm. ARM rates are often lower than fixed rates. For someone who doesn't expect to own their home for more than five or 10 more years, they might consider refinancing to an ARM to take advantage of a lower rate for the initial fixed period of time. Get a Longer or Shorter Loan Term when you refinance your mortgage, your loan term essentially restarts. Your lender will usually offer you loan terms between 15, 20, and 30 years. Some people may use a refinance to pick a shorter loan term and pay off their loan faster. Others may default to getting another 30 year loan, which can decrease your monthly loan payments but stretch out the amount of time it takes you to pay off your loan. Access Equity for most people, their home is their largest asset. When facing financial challenges, some people naturally turn to their equity in their home. With cash out refinancing, you can refinance your loan and pull out the equity you've built up in your home. Cash out refinancing is sometimes used by real estate investors who are using the equity in their investment homes to grow their real estate portfolio. But it can be a slippery slope for people who are pulling cash out of their primary residence. We've probably all heard the stories of people who continue to pull the equity out of their home through cash out refinancing to fund expenditures and stay chained to their mortgage for life. If your goal is financial independence, cash out refinancing probably isn't the best option for you to be continued. You just listened to part one of the post titled Should I Refinance My Mortgage? By Scott Rickens of PlayingWithFire co. Hey
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- [09:35]
Scott Rickens
Some great advice here from Scott on considerations when refinancing. I myself was curious about refinancing my home back in 2020 due to the low interest rates, and I ultimately decided that the savings I would receive from a lower interest rate wouldn't be realized due to the cost involved in refinancing. And I didn't even take into consideration the cost of an appraisal or origination fees. So appreciate Scott pointing this out. I suspect that the less you owe on your home, the less appealing refinancing becomes due to all the costs. Scott also mentions that people refinance to adjust the term of the loan from say 30 years to a 15 year loan. However, I've also seen the recommendation to keep the 30 year loan and just pay it as if it was a 15 year loan when you have the cash flow. That way, if you have a job loss or other impact on your ability to pay, you now have the flexibility of a lower mortgage payment should the need arise. So when your financial situation allows, you can put extra money toward your balance and pay off the loan faster, turning it into a 15 year mortgage. But when money's tight, then you can take advantage of the 30 years lower payment and use the difference to help pay with other bills. Well, that should do it for today. Have a happy rest of your day and great weekend. I'll see you tomorrow where we'll finish up this post and where your optimal life awaits.