Shownotes Transcript
- It's happening! Mortgage rates are finally dropping a little bit. That's right, at the time of this recording, mortgage rates have dropped to their lowest level since May of 2023. So does that mean now is a good time to refinance your mortgage? Or should you wait to see if rates go down even more? And how do you calculate all that in the first place? Well, you'll find out in today's video. But first, make sure you hit those like and subscribe buttons and share this with all of your friends who are at their lowest level since last May. They could use a pick me up. - I know I'm gonna be okay!
Okay, so unless you've been living under a rock, you know that mortgage interest rates have been about as high as Snoop Dogg on stilts in a hot air balloon. I'd pay good money to see that. But recently, they started to creep down a little bit. But just a bit, a tad, a skosh, if you will. So should you refi now? The answer is...
It depends. There are right and wrong times to refinance your mortgage, and it shouldn't be based on interest rates alone. So first, let's go over when it's a good idea. It might be a smart move to refinance if any of these three things apply to you. Number one, you're switching your loan type. Specifically, if you're going from an adjustable rate mortgage or an ARM to a fixed rate mortgage. So with an ARM, interest rates start lower for a little while, making payments more affordable for now. But ARMs just transfer the risk of higher rates off the bank and onto you.
which can lead to higher monthly payments and create financial stress if rates go up later or if your life circumstances change. So if that's the case, I would refinance to a fixed rate mortgage if I were you. All right, the second reason it might be a good idea to refi is if you are shortening your loan term.
Now, contrary to popular belief, the ideal mortgage is a 15-year fixed rate, not a 30-year. Here's why. You'll have a lower interest rate with a 15-year, and worst case, you pay off your house in half the time, 15 years, saving you potentially six figures in interest alone. Wow.
That's a lot of money. Now keep in mind, a 15 year will increase your monthly payment. So if you do this, make sure that your new monthly payment will be no more than 25% of your after tax take home pay. Because you'll need plenty of room in the budget to tackle other financial goals like investing and paying for your kid's overpriced college and chartering a hot air balloon with Snoop Dogg. Whatever floats your balloon. That's how the saying goes. No it's not.
It all boils down to this. You want to own your home as soon as possible instead of your home owning you. All right, the third and last reason it might make sense to refi is probably what most of you are thinking in light of recent rate drops. And that's if you can lock in a lower interest rate. As the age-old tongue twister goes, how low would a rate need to go for a refi to save dough?
Fun fact, same guy came up with the Woodchuck one. Shame, this one never took off for some reason. I wonder why. Well, refinancing to a lower rate depends on the market and your current situation. But in general, if a refinance can drop 1% to 2% off your current interest rate, you should think about it. But remember, a refinance comes with closing costs, just like your original mortgage. So you should only refinance if you're planning to stay in your home for long enough for your interest savings to make up for those closing costs. So
So those are three situations where it could make sense to refinance if you switch your loan type, shorten the term, or lock in a lower rate. But there are also some situations where refinancing is a terrible idea and can totally screw up your life. And if you cooperate, we'll cover that in just a minute. But first, follow my finger. Good, good.
Hey, eyes up here, chief. Now that you're present and accounted for, I can tell you this episode is sponsored by BetterHelp. Listen, I love a good relationship. And the only thing I love more is a great relationship. But great relationships, that takes work. It takes effort. There's challenges. And one of the best ways to approach that is with therapy. And that's why I love BetterHelp.
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So when is it a terrible idea to refi? Well, you shouldn't refinance and get into more debt because you want to use your equity to do things like get a new car, pay off credit card bills, remodel your kitchen or any other part of your property, roll up other debt like credit cards, student loans, medical bills into a refinance mortgage. And here's why. Wiping out your home equity to buy new stuff you don't need puts your home at risk, especially if you lose your job or have other money issues. You don't want to lose your home because you couldn't live without that added kitchen island with some shiplap.
But I want it now! So to recap, if you're thinking about refinancing so you can do one of those things, please don't. And if you look at all the factors at play and decide it is a good time to refi, here's what you need to know. Refinancing isn't free. Just like your original mortgage, you gotta pay closing costs to refinance, usually several thousand dollars. And the actual amount will vary depending on your situation.
So to figure out if it's worth it, you need to do a break-even analysis. This basically calculates your savings and interest minus the cost to refinance. And that will show you exactly how long you need to stay in the house for this to be worth it. Now, I'm not going to lie. There's a lot of math involved here. So if you want help with this, which I recommend, I'll drop a link to help you get connected with a lender I trust to crunch those numbers.
Okay, I know that was a lot, so here's your TLDR. Basically, the right time to refinance is when you can make a less than desirable mortgage better, either by shortening your loan term, lowering your rate, or getting rid of an arm. But you gotta make sure it doesn't cost you a leg. What?
We're cooling the drool. That's where the break-even analysis comes in. And whatever you do, please do not try this viral mortgage hack. Check out the video to find out why. And if you want to know more about mortgages and all the types and the traps out there and what to do instead, check out my book called Breaking Free from Broke, where I've got a whole chapter called Mortgages. I'll drop a link below if you want to get a copy.
As always, don't forget to like this video, subscribe to the channel, and share it with all of your friends who keep up with mortgage rates like you keep up with The Bachelor. I happen to keep up with both. Joey, if you know what's good for you, you'll go with Daisy. Thanks for watching. We'll see you guys next time. How low would a rate need to go for refi to save dough? Is it a riddle? No. Is it a rhyme? Yeah. I'm not asking. It's hypothetical, Producer Alex. No, it's not. It's just a rhyme.
