When Does Refinancing Your Mortgage Make Sense?

ali is with us in houston texas hey ali welcome to the dave ramsey show hey dave how you doing better than i deserve how can chris and i help i'm actually going through a refi right now i'm going from a 30 year to a 15 year and i'm just having trouble calculating my break-even point because you're trying to use the payment use the use the interest rate difference what is your current what is your current interest rate and what will your new interest rate be my current interest rate is 3.75 and the new 15-year will be 2.125 okay so we got 1 875 difference right did i do that right uh one six three yeah one one six i can't do it okay uh crap i'll round it all right so let's call it one and a half spread all right what's your balance my balance right now is 358 okay so every one percent you save is 3 500 a year and so we put another 1750 on top of that and so we're at 4 500 or so 4 600 bucks right and so we're saving four or five thousand dollars a year in interest as a result of this regardless of the payment that's what your actual savings is the payment is the rest other portions of the payment in either case are going to principal so this is the change in your expense which is your interest and so if you're saving five thousand dollars a year in interest uh which it sounds like with around my rounding errors you're probably over five thousand what is your closing costs on this my closing cost is between four to five thousand and i have to bring another 10 000 to the table to get my ltv to 80 yeah but that's that doesn't affect it either okay because that that's actually principle so your actual expense is only five grand so your break even period is about a year okay that's awesome and you're going to keep the house longer than a year you do this deal yeah i think i'm going to keep it for about 18 months that's kind of my target right now yeah it's weird borderline to score the screw with all this yeah why why 18 months what are you gonna go do after that i i don't know i'm just a very undecided person i don't know what the future holds for me so i know for the next 18 months i'm going to be here okay well listen well yeah do do the reflections because you're just waffling and stuff and so you you put yourself in a good position within a year you're going to recoup uh it's a smart move overall without a doubt and when your next real estate buys go with the 15-year fixed on the front end okay let's not have to redo and update and clean up all that 15-year fixed right out of the gate if you're not paying cash yeah okay there we go yeah but the way folks the the recap is what is your change in interest rate oh no i'm gonna write this down all right change in interest rate that is the only expense you're saving on right everything else the payment change from a 30 to a 15 is a principal change that's right but the only thing you're actually saving is so if you're saving one percent on 200 000 you're saving 2 000 a year and if it costs you uh 3 600 bucks to do that refinance you got a break even period of just under two years you divide the your expense by your savings and that gives you your break-even point there you go it's a break-even analysis and if you're not going to keep the house longer than that and most of the time the general rule of thumb is it needs to be under three years your break-even point needs to be under three years because because something's going to screw up or flip or something during that three years the average mortgage stays on the books only 5.6 years in america due to refinances and resales gotcha okay and so which makes sense but you've also said you would not refinance just to lower the rate no just to lower the term lower the term i mean i'm sorry we definitely do for a rate if you've got a one percent or better rate difference then it's something to really take a good look at but not to refi just to reduce term yeah the reason and just run it out and say how quickly do i get my closing costs back with the interest saved right and is that three years or under and am i going to stay in the house that long then the answer is yes you refinance if you have a 30 let's say you're sitting on 3 30 right now you're not refinancing that you're not refinancing a three percent because you're not gonna get enough savings if you got three percent thirty just calculate what a fifteen year payment is calculate what your thirty year payment is right and make the difference as an extra principal payment and it will pay off magically in fifteen years that is true because it's the reason it pays off in 15 years is the extra principal payments right the interest doesn't change that and and you know sometimes people get the idea because they look at an amortization schedule that oh i paid all the interest on the front end no you paid the interest on the outstanding balance the entire time you had an outstanding balance that's exactly right because the way amateurizations work on mortgages if you have a traditional mortgage and not a rip-off mortgage of some kind is it is it's uh it's calculated like simple interest how much interest is charged that month on that outstanding balance and all the rest of your payment other than that amount is going to principal and so anytime you reduce the principal you reduce that amount of interest right and it slides you forward in the m schedule that's right and i want to warn people out there with all the rates that are happening you want to know the difference between an apr and your contract rate okay the contract rate is the advertised thing the apr is what your payment's based on so any other points or hidden fees are going to be inside the apr so when you call a bank or lending institution you want to know i want to know the contract rate and i want to know the apr you want to know both of those yeah you can get snooker messing with just one without a doubt it's good it's a good discussion because it's a great time to refinance right now it really is way down yes but only if you're going to stay in the house

Channel: The Ramsey Show - Highlights

Views: 314,269

Keywords: the dave ramsey show, budget money debt cash, real estate, insurance, how to make money, dave ramsey, save, credit card, compound interest, buying house, buy, snowball, When Does Refinancing Your Mortgage Make Sense?, mortgage refinance, refinance, refinance your mortgage, mortgage, refinancing, how to refinance your mortgage, how to refinance, refinance mortgage, when to refinance, mortgage rates

Id: J4JLrR5Ic9U

Length: 6min 1sec (361 seconds)

Published: Fri Aug 07 2020