A (2:28)

All right, now, there are several different kinds of refinances. Give a breakdown of what they are and how people use them.

B (2:35)

Yeah, so first one's rate terms. So like I said in this example, if you're at seven and a half and we can get you a six and a half for, for instance, you can do a rate term refinance. That means if you owe 500,000 on your current mortgage, we get you a brand new loan at 500,000, pay off your old one, and you now move forward with your new one at ideally a much lower interest rate. People usually ask why it's called rate term refinance, not just a rate reduction refinance. It's because you can also change the term. So for instance, if you're on a 15 year and you want to refinance into a 30 year, that's something you can do, Right? You can change the rate, which is 99% of why people do it, or you can change the term, which is why 1% of people do it. Right? That's one section of refinances. Those are typically cheaper than the alternative, which I'll go to now, is called a cash out refinance. In our same example, if you owe a $500,000 mortgage and you want to refinance and put a $600,000 mortgage on the house, we take 500, pay off your existing loan and you pocket the 100,000. Okay, so that's where you're taking money out of the equity in your mortgage. Both of those are refinances. Cash outs are usually a little bit more expensive on the interest rate, but still very manageable with where the market is trending recently. Which is good news.

A (3:54)

Yes, absolutely. So you can do a rate and term and you can lower your payment. You can do a cash out and that may lower your payment. It may raise your payment depending on your principal balance. But if you do raise your payment because you did a cash out refinance, it doesn't raise it as bad because rates are down from where you're at. So you don't have to wait for rates to drop to do a cash out refinance. You would need to wait for them to drop to do a rate in term. But if they're down it, you get more bang for your buck. It's better if you're going to borrow more money to get it at a better rate and you can go buy more real estate, you can renovate the property that you just refinanced. So it's not a reason there, right? Real estate refinance rehab.

B (4:35)

Well, let me, let me give you. We. I feel like we haven't done like a hack, right, or like a sneaky tactic in a while. That's kind of where we, where we started Mortgage Mondays, right? Teaching all people the gray areas. And there's actually a hack with refinancing. So if you guys are interested in this, this is a little bit more complicated of a strategy, but something that if you want to be walking through for your situation, give us a call. But what you can do, because how I said cash outs are more expensive. What you can do, if you want to access equity in your property but still get the lowest possible rate, we can have a six month buffer. What that means we can do a cash out refinance for you. Now you take the higher rate, so you accept a higher rate than what you could get otherwise on a rate term refinance. Let's say that's 6.75 right now. Okay. Where rate term refinance rates, we may be able to get you at a 6.25. Okay. So there's a half a percent margin there. You may say, christian, I want the 6.25 and I want my cash. There's a way to do it. We do a cash out now, give you the higher rate, and six months later we do a no cost refinance rate term for you. So it's two loans, but there's a way to balance the closing cost to where you only really pay for one without getting too into the weeds there. That's a little bit more complicated strategy. If that piqued your interest and you wanted rate term rates for the cash out access to your equity, give us a call. I can walk you through it. It's a fun strategy that we're utilizing more and more, especially in this decreasing interest rate environment.

A (6:10)

We need to come up with a name for this hack. We'll be thinking of that when we're on today's show because Brandon Turner's not here, so I got to come up with the name without him for years, he was the guy who did all the clever naming. All right. Mortgage rates last week dropped to the lowest level in a month, pushing more borrowers to refi. Potential home buyers, however, were not as enthused. And to me, this is the theme of what we're talking about today. There are a lot of people refinancing. There are not a ton of people buying that. Those two things used to be synonymous. When rates dropped, you had a lot of refinances, you had a lot of more buyers. It drove the market up and it sort of like synergistically helped because if you refinance and pulled money out, you had more money to go buy and you had more reason to go buy because rates were low. So the whole thing was pushing the market to be spinning. Christian and I do our best to blind read these things. We don't like to read it ahead of time. So we like to be hearing it for the first time, as you are. Mike, My guess is you're going to be hearing what I just said and then we're going to talk about why the market's being affected in that way. The average contract interest rate for a 30 year fixed rate mortgage with conforming loan balances, which is 8006500 or less. Now that's going to be area specific, right? Christian?

B (7:23)

I'm sorry, David, say that one more time.

A (7:25)

The average contract interest rate for a 30 year fixed rate mortgages with conforming loan balances, which is $806,500 or less. But that's going to be area specific, right? Yeah.

B (7:35)

100% conforming loan limits are not set by your lender. This is a misconception. A lot of people think they can go shop around for different loan limits. That's not the case. These are set by the federal government. These are set by, well, the GSEs, Fannie Mae and Freddie Mac. And it goes zip code by zip code. So I've always thought it was a little misleading by calling it county conforming loan limits. It's not really based on the county, it's based on the zip code. Okay. So there's literally imagine how many zip codes there are in America. That's how many times Fannie Mae has gone and analyzed this, right?

A (8:05)

Yeah.

B (8:06)

Now, surrounding zip codes are usually equivalent. You know, like the Bay Area, for instance. Right. Oakland and San Francisco or have the same conforming loan limit. But. But yes, they are different based on your market. So we run into this all the time. If you get pre approved and it's in Texas and you have a change of heart and you want to move to Tennessee, you have to talk to your lender because your pre approval that was good in Texas may not be the same pre approval you'd get in Tennessee because of exactly this issue. There may be different limits that you can get on standard conforming loan amounts that are determined not by you, not by your qualifying, not by your credit, not by the amount of money you have in the bank, but by the zip code in which you buy. So be very, very careful when you're searching. If you have a large radius or investors who invest out of state, make sure you're updating your pre approval, if you've pivoted markets, and make sure your lender is aware and can analyze your situation properly.

A (9:03)

So this would work out when I'd have a Sacramento listing and this person believed that they were pre approved for say a million fifty thousand and they're writing an offer at 950,000, thinking they have plenty enough, but the conforming loan limit is significantly less. It's like 750, so they can only borrow like 95% of 750. So they'd have to put the other 200,000 down in cash. And nobody ever told them the entire time that what you just mentioned with the zip code. So I appreciate you pointing that out. People can get themselves into hot water easily.

B (9:33)

Absolutely. Yeah. Happens much more frequently than you guys think. So just another example of if you're getting a loan, talk to the guy structuring your loan, right? Let him know your changes. Let him know if you have a change of heart. Let them know if you're moving to a new market. Let him know if you're changing purchase prices so that we can make sure we dot all our eyes, cross our T's. Because from David's perspective as the listing agent in that story, they don't want surprises. If they get a pre approval, that means that lender believes they can close. Nobody wants to go two, three weeks in escrow and have the lender say oopsies, right? That's, that's a recipe for failure. So good communication solves 99% of problems in transactions.

A (10:08)

Well, this problem occurs when people look at the lender like, hey, you just stay over there and you give me the money. We'll take care of it from this point forward. When you cut them out and push them away and you're like, I just want the cheapest rate or you're not a part of the team, you're not a part of the plan. Me and the agent will figure this out. You just show up when it's time to give me the money. This is very easy to go down. And if you're not listening to mortgage Monday you would know that it's even a possibility. So rates went down from 6.42 to 6.37 and points fell from 0.59 to, sorry, 2.59 from 0.61, including the origination fee for loans with a 20% down payment. So that's not a massive drop, but it is a consistent drop as it has been consistently dropp helping. As a result, applications to refinance a home loan, which are most sensitive to weekly changes in interest rates, rose 4% for the week and were 81% higher than the same week a year ago. According to the NBA seasonally adjusted index. The rate On a the 30 year fixed was 15 basis points higher a year ago. So how much is 15 basis points, Christian?

B (11:16)

15% of 1%.

A (11:18)

So there you go.

B (11:19)

Yeah, if you just take your loan amount and times it by 1%. So 500k is 5015 bips or basis points is 15% of 5000, which you have to excuse me for not doing my math properly.

A (11:32)

Well, let's say that would bump you from 6.5 to 6.65.

B (11:35)

That's right.

A (11:36)

Or from 6.6 to 6.75. That's where it was a year ago. A basis point is 1 percentage point. The refinance index increased 4%, driven by a 6% increase in conventional refinances and a 12% increase in FHA refinances. Refinance applications as borrowers remain attentive to these opportunities to lower their monthly mortgage payment. VA refinances bucked the trend and were down 12%. Any idea why VA refinances may be down?

B (12:06)

You guys may be out of the loop, but there's some stuff happening with our government right now. I, I think there's probably less VA applicants because there's less people working for everybody.

A (12:16)

Can you imagine? Just like desperate to try to get giraffe going and there's no one to answer the phone or answer your emails because all the government workers are not working. Oh yeah, that's gotta be maddening.

B (12:26)

Products government loan products which include FHA as well. FHA and VA are primarily 99% of the loan products that are offered by the by the government. The government shut down right now, which means VA and FHA loans right now are not fun to do. We're doing a VA loan right now and I think there's still some staff working at the VA, but response times are like 10x what they usually are. It's not a great time. So it's not Surprising to me that during a government shutdown, VA applications decrease because, number one, people don't want to deal with it. And number two, there's just less people. Right. You're going to get less applications from less people. Right.

A (13:01)

Some lenders are offering their lowest rates in over a year and some in over three years, although there was no particular reason for the drop. Okay, I don't know if I agree that there was no particular reason for the drop, but that's what this article says. What is your thoughts on why refinances are up 81% from where they were at this time a year ago?

B (13:23)

Yeah, I mean, purely rate based. I mean, if somebody's sitting there looking at an 8% and they can get a six and a half, there's almost no situation that makes sense not to refinance that there's such a significant savings. And if you got your loan within the last three years, like remember loans, most loans are on a 30 year term, right? So on that loan that you're at right now, you have 27 years remaining. Let's say, assume you got, you know, some lenders are offering their lowest in three years. That's kind of a little, you know, spam reading or bait, whatever it's called, right? A little clickbait. Clickbait, yeah, clickbait. Actually, we're probably actually pretty close to the lowest rates in three years. So maybe we're part of that clickbait. But you know, if you're on a 30 year term and you're one to three years in, you guys, if you guys have ever really looked at an amortization table, which is the time period in which you pay your loan down in the first five years, you pay almost nothing down on your balance. I just talked to a borrower the other day who got a loan with us. I think it was eight months ago. It was back in February. So, yeah, about eight, nine months ago. We're recording this in October. And his rate I think was like seven and a quarter, right? Something like that. And we're refinancing him to six and a quarter right now, so shaving 1% off. And we pulled his payoff statement. And he's like, christian, how come my loan balance is the same as when I bought the property? It was like plus or minus a few thousand bucks. And I'm like, you only bought it. You've only made six mortgage payments. He's like, yeah, but like six mortgage payments of paying, you know, $6,000 a month. I'm like, yeah, but it 5,700 of that is interest. Right. So that's where people get confused like, oh, I don't want to reset to 30 years again, but your, your payoff period is going to be structured almost the same because in the first three or four years you almost don't pay anything off.

A (15:12)

Yeah, there's no, no principal.

B (15:14)

Very little goes to principle.

A (15:16)

What's your thoughts of people who have that concern? Let's say that they've paid their mortgage off for three years and they. I don't want to reset to 30. Should they refi at the lower rate at a higher amortization schedule? So maybe a 25 year loan. And are there options if they want to just start at 27 years where they were when they stopped?

B (15:36)

Absolutely. It's an awesome discussion and one that we do. Absolutely. So Dave, in your example, they're three years in and they want to switch to a 25 year amp. You can drop your rate and shave two more years off that payment. Right. If you have 27 left now at a high rate, we could take you to 25 at a lower rate. To answer your question, if there's like the in betweens, like can you do a 27 year M. Technically, yes, but I want to be careful and say not for every loan product. So like DSCRs, you can't do that. And we do a lot of DSCRs, so I have to make sure that I advise people that way. But a lot of conventional loans do have options of like 27, 24, 22 years. Now keep in mind that will impact your payment. Your payment is higher for a 25 year a.m. than a 30 year a.m. because there's five less years you're paying. Therefore you have to pay faster. Right. You pay a large amount every month. But absolutely. It's a conversation that makes sense for a lot of people who don't want to reset that payment period back up to the full 30 years. I kind of make the argument that like you guys would be so surprised. There's a lot of. If you guys ever want to just Google and have some fun with amortization because you're a nerd like me.

A (16:44)

I do it all the time.

B (16:46)

Yeah, yeah, but there's, there's amortization calculators where you can put in extra payments. So I play with it all the time. I say, what if you pay an extra $100 a month? So your mortgage is 3,000, you pay 3,100. I think you guys would be blown away by the amount of years that shaves off your lump. Right. A lot of people do the bi weekly payments. So you make an extra payment every year. Like I, I believe most of the times I plug that in, it shaves off about five to seven years of your payoff. So that means you're paying off a 30 year loan in 23 years. That's crazy. Same thing.

A (17:19)

That's a 23 year loan. But you didn't have to have the higher payment. You weren't locked into it. You had the option to make the payment if you had the money and not make the payment if you didn't have the money.

B (17:30)

Yeah, this, this is actually a super good topic because I get this question quite a bit of, hey, Christian, I want to see a 15 year quote, right? And we're looking at a 30 versus a 15, which the 15 is the lower interest. Absolutely. But it's a much higher payment because you're paying it off in half the time. What I tell people is, hey, if you're comfortable making that larger payment, you can take your 30 year loan and pay it off in 15 by making that payment really easily. Right. However, just like David said, you're not forced to. So especially if you have a rental property, some days, some months, you may have vacant properties. Airbnb may have seasonalities. Right. So on my short term rentals, I own a number of Airbnb. I actually do seasonal payments. What I mean by that is during like this peak season, I take an extra whatever, 500, a thousand bucks because I had really good cash flow that month and I pay it down on my principal. But during the slow seasons, I can choose not to do that and go back down and make my minimum payment. And the 30 year loan gives you much more flexibility to do that, whereas the 15 year, your minimum payment is high. So it's not like you have an option of just, oh, I want to pay the 30 year payment. Like, no, you're locked into the 15. I like the 30 because it gives you that sometimes they can pay extra. Sometimes I don't need to. As opposed to being locked in. Right. Just offers more flexibility.

A (18:53)

Yeah, that's a super good point. These are the conversations that we have when people come to us to get a loan. And these are the kind of conversations that we have in our own brains all the time. I love playing with that. Then once you get a couple properties, you can start playing it well. I've been making extra payments on this one. 50 bucks a month. I mean, that's usually what I would do when I set My auto pay up. I was like, extra 50 bucks towards principal, extra 75 towards principal. And then when you. When I acquired new properties with higher rates, I would switch that money. I'm like, okay, this one's at a 3.5. I paid it down early for four years. I'm going to take that 75 and I'm going to set the next one up to also have 75. I'm going to make it 150. I'm going to take the 75 off of this one, put it on this one, because this is at a 7.5% rate or this is at 8.75% rate. And now I'm getting sort of like amplified returns on paying my principal down faster. And in many cases at certain times in the market, you can't get an 8 and a half percent return on real estate. So if you can take your money and put it towards paying your mortgage down when there was nothing to buy, it's kind of no reason not to do that. We just never talked about this for years of podcasting because they were the lowest rates the world had ever seen. There was no reason to tell people to pay off your 3.2% interest rate right away. But when they get up higher, it starts to become a legit strategy if you're in that position. So I talk about this in the book better than cash flow, the 10 ways you make money in real estate. There's an entire chapter devoted to this strategy, Extra principal payments. There's another little hack that I talk about where you can make half the payment every two weeks instead of one payment a month. And that will basically be the equivalent of an extra payment being made every single month that you don't even notice if you're getting paid every two weeks. We talk about loan recasting. I know somebody asked you about that at bpcon Christian. What was your answer when it comes to recasting a loan?

B (20:41)

Yeah, recasting is something that not a lot of people know about. I'm gonna try to explain as best I can. A recast is when you make a bulk payment. So we're not talking like 50, 100 bucks extra a month. This is like you make a bulk payment of paying off, like 15% of your loan balance. So if you owe a million dollars, you're bulk paying 150k. Okay. A lot of lenders will have a clause in their loan agreement with you that at any point in time, if you pay off more than 10% of your balance, they will allow for you to Recast your loan. What that does is, let me explain how it works. If you don't recast, if you pay off 150k, your payment does not change in later months. So if you owe $3,000 a month and you bulk pay 100 grand, your payment next month is still 3,000 bucks a month. Right. And you may say, oh, but I paid off so much of my mortgage, you're correct. You're just going to have to pay $3,000 a month for fewer months.

A (21:36)

And, and at the same time, a higher percentage of that payment will go towards the principal versus the interest. So you bought yourself time in the amortization schedule. So you are getting that money back faster, but it's still the same amount of money coming out of your bank account. It's just a bigger part of it goes to principal rather than interest. Right?

B (21:56)

It's exactly right, yeah. So at that 3000, if you were like 500 bucks principal, 2500 interest after your bulk payment, you may be like 1500 principal, 1500 interest.

A (22:07)

Right.

B (22:07)

And this is all, there's free calculators online. You just google amortization calculator with extra payment and you can see how an extra payment would impact your payment history.

A (22:15)

Right.

B (22:16)

Now if you recast, it's different. If you recast, what you're doing is you're paying that same $150,000 bulk payment and you now go to your lender and say, I want to re amortize my mortgage. What that means is I want you to take the current balance and let's pretend like you're 5, 500.

A (22:34)

Let's say it's $500,000 that you owe.

B (22:37)

Yeah. And say you make a bulk payment of 100 grand, that's 20%.

A (22:40)

Yep.

B (22:40)

Right. That would apply for most lenders to apply for a recast, they would now take the 400,000 that you owe now because you paid 500 down by 100 and they would re amortize it over. Let's say you have 25 years left on your loan. Right. So you're five years into your 30 year mortgage. They'll now take 400,000, amortize that over 25 years and drop your payment to the new amortized payment. Right. That would change your monthly payment. So now Instead of paying 3000amonth, you'd probably pay 2200 or whatever it is. Right. That's the thing. You have to, it doesn't happen automatically. So that's where you call in your mortgage servicer and you say, I'm Going to bulk pay. Can we recast and re amortize my payment? If you desire. Like this is a situation where maybe an investor desires more cash flow.

A (23:29)

In the book, I literally refer to this as one of the strategies for what I call buying cash flow.

B (23:34)

Yeah, that's what you're doing. It's basically like putting a second down payment. That's how you think about it, right? You're putting a down payment after you bought the house. And this can come like if you get an inheritance, if you get like a big bonus. We work with so many like tech executives that like some of their bonuses still blow my mind even in today's world. Like, I just pre proved a guy the other day who had like $180,000 bonus and it happens four times a year. I'm like, good lord, man, you're killing it. That's great. But take one of those quarterly bonuses and go make a bulk pay on your mortgage and request a recast. Like could be a really useful thing for you, right? If you like win the lottery or if you sell another asset, right? Anything that leads to you having a bulk surge of, of, you know, income or profit or, you know, money in your bank account that could just sit in your account. You can go buy a CD or something with it, you can do whatever or you can go significantly impact your cash flow or just your primary residence mortgage and get take advantage of a recast to drop your monthly payment.

A (24:31)

It's kind of nothing stops you from doing both. In that chapter I talk about, it's possible you could put 100 grand down, lower your payment, take the extra money that you're saving every month and put that towards the principal. And now you basically like. And it's not buying down your rate in a sense. I mean you're, you're getting a lower rate if you refinance, but it's more like buying down your principal and then accelerating how quickly it pays off with the extra cash that you're putting towards it. And this is how you get to where you either pay your house off faster or you just create a lot of equity. And then maybe you put a HELOC at it in case you need that money again. You pull it out from a heloc and if you never need it, you just keep paying it down. And these are ways you can make money in real estate that most people don't think about that aren't directly related to cash flow. And we're here for it. We're going to do a future show on this exact strategy. I call it the double down because you are doing double down payments, a down payment after a down payment and ways that this can actually get worked out. And Christian, I appreciate you being here today. This is pretty exciting news. If people want to look into refinancing their house, where's the best way? Is it the emailing you?

B (25:34)

Yeah, absolutely. You can always catch me, Christian, at the1brokerage.com as my direct email. We also have our website, aptly titled v1brokerage.com that you can find out more about what we do. And if you're interested in seeing clips or Mortgage Mondays different content things in the mortgages space. You know I put out recurring content on my Instagram @the1 broker is my handle. You can also DM me there. If you're just trying to catch me quickly. I respond to them. I try to get to it every single day. So shoot me your scenario. Shoot me what your questions are. You know, if we need to hop on a phone call to get further information, we'll do that and knock out your questions.

A (26:09)

All right, there you go folks. And I am avidgreen24 on Instagram.

B (26:13)

Go.

A (26:13)

Give me a follow. Check out some of the other services I can offer. Also check out davidgreen24.com, use a chat option. Get ahold of me in case your email didn't go through, it went to spam or you called the company number and it didn't ring, I will get you in touch with somebody directly. Thank you guys for following us. This has been another episode and we'll see you next week on Mortgage Monday.