The Joy of Refinancing

This week we refinanced two mortgages! This will be our third refinance in six months and four total since we’ve been homeowners. What makes the two this week so special is that they are on investment properties, a first for us.

I’ll start by saying we probably have not refinanced our mortgages enough over the years. All four refi’s we’ve completed were positive outcomes. I am certain if I had paid a little closer attention over the years, we probably would have made a couple more beneficial financial moves. Refinancing is an excellent way to save money over the long haul.

That being said, mortgage refinancing is not quite as simple as the advertisements would make it out to be. Below are our three takeaways on refinancing mortgages. As always, a disclaimer, this is just my commentary on refinancing and certainly not meant as financial advice!

1. Knowing when to refinance. This is probably the toughest one. For us, we didn’t even consider refinancing unless we could get a minimum of one point lower than our current mortgage. Anything less and the breakeven math (more on that later) usually doesn’t work out advantageously.

We’ve refinanced our primary residence twice, once about ten years ago in Texas and again this past December in our current home. During our first refinance, we knew we’d be leaving the area soon and would turn the property (a duplex) into a 100% rental property.

Usually, refinancing doesn’t make sense if you know you’ll be moving soon but there are exceptions as I’ve just pointed out. In the case of our second primary residence, it was just too good an opportunity to pass up.  We dropped nearly two points and lowered our payment by $300!

The refinances we are closing on this week are on two investment properties. I previously inquired with other lenders about refinancing investments and either got a “no” or a rate quote that didn’t make it worth our time. Not sure if it was luck or timing but we found a lender who gladly refinanced our investment properties saving us $300 a month!

Another key consideration when refinancing is amortization. As the borrower pays down a mortgage, the monthly ratio of principal to interest (slowly) increases, thus raising the amount of equity in the home.

When refinancing, the amortization resets! The owner will still build equity, but back to a slower rate. Not to mention, the payoff date could slip to the right by a few more years.

This again comes back to length of ownership. If it is a forever home or a long term investment property, resetting the amortization is not that big of a deal. If planning to move or dispose of the property within the next ten years it might be worth taking a look at an amortization calculator!

2. Calculate the breakeven point. Refinancing is not free! Closing costs and loan origination fees can add up quickly. Additionally, the outstanding rates we see advertised usually require prepaid interest from 1 to 3 points of the loan amount.

Of course, one can roll these costs into the mortgage principal, but I personally never liked doing that. Any savings in a lower interest rate could be reduced due to increasing the principal!

For three of our refinances we paid loan costs and prepaid interest out of pocket at closing. Our most recent primary residence refinance was a VA streamlined process and the closing costs were so minimal we just tacked them on to the principal.  We didn’t bring any cash to closing and will break even in 18 months!

Real estate is a long term investment and that is why it is important to consider the break even when refinancing. If rolling closing costs into the principal makes your monthly payment only slightly less, then it will take longer to recoup what was tacked on to the principal .

If bringing cash to closing, then it’s a little easier to calculate the break even. If saving $150 on monthly mortgage payment and there were $5000 in closing costs, then it will take about three years to break even.

Our rule of thumb is maximum of around three years for break even. I think anything more than that starts to introduce a little risk.

After crunching the numbers and determining refinancing is the correct move, what to do next?

3. Find the right lender. With the total bombardment of advertising these days, it is hard to know who to choose. I learned early on not all lenders play by the same rules.

Most of the time, the ads we see are mortgage brokers who will set up the loan and then promptly sell it off to another entity. In other instances, a homeowner may deal directly with the bank who will hold the mortgage.

Regardless, each will have different policies on lending. We have a total of seven mortgages! When we went to buy our 5^th rental property, the bank we usually did business with told us we couldn’t borrow any more due to regulations. I almost panicked!

But after making a few calls, I found a mortgage broker that would approve the loan as long as we were qualified. Similarly, this same broker was happy to refinance our investment property loans when others were not.

We established a relationship with this lender and now, because they have all our information on hand, getting a loan is a snap! Not to mention, it is great working with the same folks.

This doesn’t mean we don’t shop around every time we are thinking about refinancing or purchasing a new property. But the convenience of having a lender we know and trust goes a long way.

Don’t settle for bad terms or take the first “no”. Take the time to shop around for not only the best rate but also a lender you can trust before refinancing.

There are a lot more nuanced ins and outs to refinancing and mortgages in general but I’ll spare the details! As I opened with, we haven’t had a bad experience refinancing and my only regret is we didn’t do it more.

Next week I’ll shift gears to a “living” topic before spending the month of May exploring topics from my new book, “Millionaire on a Worker’s Budget: Five Financial Truths to Build Wealth”.

The commentary provided in this blog is for informational purposes only and is not intended to be a source of financial or investing advice.

Use the links in the about section below to follow on social media or subscribe for emails to receive updates on the latest weekly blog at www.normspivey.com!