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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