Should I Consider Refinancing My Morgage?

Warren (00:03):

Hi, welcome to our weekly financial workshop. I'm Warren Burger, I'm the founder of luminary financial advisors, and we try every week to take a different financial topic and break it down into sort of a, an easy to understand format that hopefully will apply to your own financial wellness. And after I give the presentation, if you have any questions that I might be able to answer, please feel free to put them in the chat and we'll do our best to answer them. So let's take a look at today's topic. So today's topic is, is should I, should I consider refinancing my mortgage? And I, I phrased it in a question that way, because we, I put this together in a flow chat flow chart format to sort of walk through the decision-making process that you might make in deciding whether or not you want to refinance your mortgage and just like any financial decision, the decision to refinance your mortgage should be a strategic one that weighs the pros and cons and the upfront cost versus what you're going to save over time.

Warren (01:09):

So we don't want to just look and say, Hey, interest rates seem lower. So I should be getting a, a refinancing on my mortgage. We really want to take a look at, does it make sense for our personal financial situation? So that's why I sort of phrase it this way. And, and and you'll see as we go along here. So before we get started I just have to I just have to talk about the disclaimer that I have for these videos. And it's basically just to tell you that we're just trying to give educational information. It's not legal or accounting or investment advice. This is really just in the hopes that you can take some of this financial education, apply it to your own personal life. If it works for your personal your personal situation, and then run it through with your attorney or your financial advisor or your accountant, just to make sure that this does work in your own personal situation. So just to put that out there.

Warren (02:06):

So let's start with one of the first decisions that we're going to look to try to make as we're evaluating refinancing our mortgage. So the very first question that you need to ask is, is do you plan on, on remaining in your home for at least a few years? So you essentially are going to be paying some upfront costs on the refinance, and you want to make sure that those costs are going to be represented with the length of time that you're staying in your home. So if the answer is maybe, or no, if it's no, then you probably want to rethink a refinancing, but if it's, maybe you're not quite sure what you want to do is try to calculate the break even on your refinance. So you do that by just dividing your mortgage closing costs by the monthly savings that you're going to be able to obtain through that refinance.

Warren (02:56):

And then that will ultimately give you the of months that it will take for you to repay those upfront costs. So you can start to get a better a handle on, you know, how long do you want to be in your home? Does it make sense to, to, to put out those upfront costs you know, four to five years often you'll, you'll end up seeing is sort of around where most of these break even points are but it does vary for, for each situation. Now, if you do plan on remaining in your home for a lengthy period of time the next question that you want to ask yourself is, are you nearing a milestone events such as retirement or the end of a, an adjustable rate mortgage or balloon term? And if that is the case you might want to consider refinancing or resetting if you're, if you're looking at a balloon loan before your options become limited by time or income restraints.

Warren (03:47):

So what does that mean? Well, if you're, if you're retired, you're now going to find yourself where your income is going to be limited compare, likely limited compared to what you were making before. And so you might not be able to qualify for the refinance. Like you thought that you might as well as the time factor as you get in close to this the adjustable rate mortgage term or your balloon term, you want to make sure that you have enough time to be able to put these processes in place. So if that's the case, then we move on to our next decision to see, you know, where the other factors that we want to take in. So the next question that you want to ask is, is your loan value ratio greater than 80%? So in other words, is the value of your a, is the value of the loan going to be rater than 80% or, or less than 80% of, of what your mortgage is going to be.

Warren (04:38):

And if the if the loan value ratio is less than 80% then you know, or your sorry, your loan value ratio is greater than 80%. You might have a hard time refinancing because essentially they're saying that the value of the, the, the loan they're going to command either a higher interest rate or potentially asked for personal mortgage insurance or PMI, which is essentially the bank going out and getting insurance for themselves in the event that you're not able to pay back the loan. So, so the personal mortgage insurance, sometimes people think that that's, Hey, if I can't pay my, my loan, I'm paying for this insurance to help me out. And that's not really the case. It's actually, the bank is going to another insurance provider to protect themselves and you're essentially paying for it. And so, so, you know, you may end up having that, that ratio less than 80%, you may have a hard time refinancing.

Warren (05:35):

So you might want to rethink it in that case. If the loan to value ratio is not greater than 80%, then you want to ask, has your credit score recently improved? If it has, well, then you probably gonna move one to move on to the next decision which we'll get onto. Another question you're going to ask is your current rate of fixed rate mortgage. If it isn't a fixed rate mortgage, we might want to move on and look at our next decision. If it is not a car, a fixed rate or, or a mortgage at the time, and it's actually an adjustable rate mortgage then you want to ask yourself the question, do you expect rates to be lower than your current rate in the future? And if it is, yes, if you do have that expectation, then you want to consider waiting to refinance to lock in that lower rate in the future.

Warren (06:22):

Okay. And that's, you know you're trying to time markets, you're trying to look at what you think it should. You're going to do over time, especially now where we're in sort of flux when it comes to interest rates, it's a tough thing to predict. So you really want to try to work with someone that's really up on these issues to try to work through that process in your own mind, to see if you think rates are going to be higher or lower in the future. But now if we've, if we've decided that the you're expecting your rates to be lower than your current rate in the future, if you don't expect that to be the case, well, then you're going to move on to what the next decision might be and trying to get this a refinance. So moving on, the next question you're going to want to ask yourself is can you qualify for a new loan rate that is meaningfully lower than your current rate, or that removes the PMI if it's applicable, applicable, applicable.

Warren (07:13):

So if you had gotten a you ha your loan ratio was not where you wanted it to be, you ended up having to pay that private mortgage insurance. You may find yourself in a situation now where you can get a rate or that your home has appreciated and value enough that you can actually get rid of that PMI payment. So if you, if you can't qualify for that, if you're not sure that you're going to be able to qualify for meaning a meaningfully lower rate it could still make sense to refinance, but you want to go back to that process that we talked about originally, where you're calculating what your breakeven rate is going to be on the loan and how long that's going to take and see if it makes sense for your personal situation. But if you do think that you're going to qualify for meaningfully lower rates or, and, or you're able to get rid of that PMI payment that private mortgage insurance payment then you want to consider a refi and look at, look at the terms of the loan.

Warren (08:12):

That's going to work best for what you're trying to achieve. You also want to consider if you're a veteran or you live in a rural area, or you have a lower credit score or income you may be able to qualify for a VA loan or a USDA loan, or an F F F H a loan. And those are the things that you're going to want to check into. And if those aren't loans that you're going to be eligible for then you're going to look at what, what is your next decision?

Warren (08:45):

So the next question is, has your home value appreciated significantly? If it hasn't, then you might be looking at trying to just reduce your monthly mortgage payment, in which case you're probably going to want to look for a 30 year fixed loan. You can take any of the excess cash you make from the savings on that refinance, and you can apply it to your other financial goals, whether it's investing or whether it's paying down credit cards or w you know, whatever it may be, the goal is to take that extra money and really put it to something useful in your life that really paints a as part of your overall financial planning picture. Now if your home has appreciated in value you're going to want to contact your current letter lender to remove any of the PMI payments that we've talked about.

Warren (09:30):

And you can talk to them about a cash refinance and see if you can apply your home equity to some other financial goals. Maybe you've been looking to sort of update your kitchen or bathroom or something like that. You may be able to, to, to obtain some of that money through this this cash refinance. If your primary goal is to reduce the interest expense over the life of the loan, then rather than looking at a 30 year fixed rate, you might want to look at a 15 year fixed, and then you could make bi-weekly or extra principal payments to pay that down sooner. So that overall the long-term interest that you ended up paying on the loan is going to be significantly less.

Warren (10:09):

So ultimately those are just a few of the decisions that you're gonna want to make in refinancing your mortgage. It's, it's a fairly simple process, but like I said, you want to go into it with a strategic vision of what you're trying to accomplish in getting the refinance and what you're going to do with any of the savings or cash out that you're going to take you really, you know, I always like to say any, any money that's just sitting in a bank account without a reason is money that's going to get spent. So you really want to go into this with, like I said, that strategic vision for what you want to achieve. So I hope that's helpful for you. If, if any of you need any assistance in your retirement planning or retirement distribution or tax mitigation strategies, or, and just you know, thinking through some of these financial factors in your life w w we're here to help.

Warren (10:58):

And so if you would like to try to get in touch with us to set up a complimentary call to talk about any financial problems or questions you might have please feel free to go to luminary financial advisors.com/get in touch. And I hope that that's something that's been helpful for you. And you know, if, if you are eligible to refinance and it does make sense, the process itself is fairly simple. We re interest rates are at a really low compared to what we've seen in in historical terms. We don't know if rates are going to go higher here in the future. There's some talk about inflation in the market, and that could have an influence on rates but we're in a really sort of Seesaw position between the federal reserve trying to maintain a status quo and the idea that inflation may force them raise rates

Warren (11:53):

In the future. So if you have been thinking about this, work through this process and see if it might work for your situation and talk to your financial profession professional to see if they can add any insight to your situation as well. So I'm just looking and I'm, I'm not seeing any questions at the moment, so I hope this has been helpful for you, and I look forward to seeing you next week. Thank you very much and have a great day.