Money Rehab with Nicole Lapin - To Refi or Not to Refi?

Episode Date: June 10, 2021

Nicole dishes out the do’s and don’ts of refinancing your home… and if you’re thinking about a refi, this episode could save you thousands.  Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. I know one of my more controversial hot takes is that buying a house is not for everyone.

A mortgage is a big old financial ball and chain that I don't recommend to all money rehabbers. chain that I don't recommend to all money rehabbers. But I will say that one awesome thing about a mortgage is that you can refinance if interest rates go down. And awesomer still is that if you have a fixed rate mortgage, which by the way you should have, and interest rates go up, it's not your problem. Your rate remains, well, fixed. That is a huge, huge deal. That gives you extraordinary power compared to the banks. Okay, let's rewind for a second. What does refinancing actually mean in non-jargony terms? Well, here's a little dictionary definition. Refinancing is the process of transferring debt from a high-rate loan to a lower-rate loan. It's like switching from overpriced cable service to something more manageable if you have the

opportunity to do so. You still have to pay, but it's not nearly as pricey. Not everyone can do it, though. You do have to have a good payment and credit history. A big reason for doing this is to have a little more cash readily available by reducing your monthly bills. So if you are able to do it, here are the do's and don'ts of refinancing a mortgage. Do interview lenders like you would a doctor or a lawyer whom you plan to use. Not all lenders programs are the same and not all fees are the same. Ask these basic questions of all of them. First, which refinancing options are available for me and what would an estimate of my monthly payments for those scenarios be? Second, what are the upfront costs? Third, what are the fees for appraisals, credit

checks, escrow, and anything else associated with my mortgage. Don't be unrealistic about the value of your home. It just stalls the process. And I hope this goes without saying, but don't lead the appraiser on. Ever. Just like you wouldn't tell someone on your first date that you're the manager of your team if you haven't quite gotten the promotion yet, even if you feel like a promotion is all but in the bag, that little white lie will bite you in the ass. The same thing will happen with an appraiser. If you have upgrades or improvements to do on your house that would increase its value, do them before you start the refinancing process. Don't promise the appraiser fixes that just haven't happened yet. Next, do ask if you have to pay a prepayment penalty for paying your current loan off early. Don't go for this thing

called a float down, which lets you take advantage of a lower rate if interest rates fall by the time the refinance goes through, which is 30 to 60 days. It's a good option to have when buying the home, but a quote lock-in, which rate locks whatever you had agreed to even if the rate goes up, is usually what you want in a refinance. If rates happen to go down a significant amount and you actually really need and want to take advantage of that, you can always cancel the refinance and go somewhere else and start over. Now, the original lender probably is not going to be stoked, but it is business, baby. Do understand and calculate your break-even point.

It gives you an estimate of how much time it will take you to recoup the costs of the refinance to start seeing any difference or benefit to you. For example, if you paid $5,000 in closing costs and save $100 a month from refinancing, it would take you 50 months, which is more than four years, to break even. If you save $50 a month after refinancing, then it would take you eight years to break even. So you have to ask yourself, is that worth it? Don't blindly accept what your lender comes back with. Look closely at both the rate, this is usually the biggest focus, and the term. Calculate whether the new package actually helps you before you sign. Generally, you should knock off at least 75 basis points from your rate

to make refinancing worthwhile. More expensive homes can justify smaller rate reductions because the savings are so much greater. I know you're going to ask, what is the basis point? Well, now it's time for a dictionary definition number two. Basis points are Wall Street's fancy way of talking about percentages. The more you get into this world, the more you're going to hear people say something like, getting two more basis points at XYZ Bank or interest rates that increased 20 basis points. Sometimes they'll say BPS or BPS, which is shorthand for exactly the same thing. So what are 75 basis points anyway? Well, think of a basis point as one hundredth of a percent

or just scooching the decimal point two places to the left. For example, 750 basis points is 7.50 percent. 75 basis points is 0.75 percent. 7.5 basis points is 0.075 percent. Why can't they just say 0.75% instead of 75 basis points? Partly to look cool and partly to quickly relay the exact percentage in a world where every hundredth of a percentage point can be big money. There is a world of a difference between 7.5%, There is a world of a difference between 7.5%, 0.75%, and 0.075% over time. So start seeing and appreciating the significance in these seemingly minuscule differences. So here's today's tip you can take straight to the bank. A bonus set of do's and don'ts.

First, do get addicted to negotiating. But don't get addicted to refinancing. I've seen people do it all too often. They try to chase lower rates and lowering it without accounting for the three to six percent of the loan balance that they have to pay in closing costs. If you refinance too often, your costs will build up and bloat your principal balance to a point where you're not actually helping yourself financially. Not to mention that you're expending a ton of time and causing a lot of headaches. While I'm always a proponent of doing your homework and being proactive, compulsively chasing down interest rates also come with opportunity costs. I'd rather have

you refinance once the right way and then spend the rest of your extra time on smart investment decisions and making more money. Money Rehab is edited and engineered by Brandon Dickert with help from Josh Fisher. Executive producers are Mangesh Hatikader and Will Pearson. Huge thanks to the OG Money Rehab supervising producer, Michelle Lanz, for her pre-production and development work. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.