Real Estate the Ramsey Way - How Do You Know When You Should Refinance?

Episode Date: March 17, 2025

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Dave Ramsey here and welcome to another episode of Real Estate, the Ramsey Way, where you'll learn how to make smart home decisions, avoid costly mistakes, and navigate homeownership with confidence. You know, George, before we get to the phones, I thought it might be fun to talk nerdy. You know I love talking nerdy. I mean, you talk nerdy is about as well as anybody I know. Well, you know more big words than anyone I know. So we both relate in that way. And so this is a fun little segment where George nerds out on the fine print, if you will, as the former host of the fine print, do you still do those? You don't do those. No, I miss it. We kind of switched it up when did my YouTube channel, which is a version of the fine print podcast. But it's the same thing. I want to break down these money concepts that can feel overwhelming, complicated. I never fully understood it. And I want to break it down quickly for the benefit of the people listening and watching. I can't wait. What is the topic today?

Refinancing. Oh. So you've heard of financing. We're talking about it. We're refinancing. Coming back to the table. Boo-ya. Okay.

And we're going to specifically focus on refinancing a mortgage. Okay? So if you bought a home when interest rates were high, you may be wondering if refinancing might save you some money. Uh-huh. Now that rates have dropped a little bit. Well, it can, but it also depends. So what is this?

Mortgage refinancing, very simply, it's when you replace your current mortgage with a new one. Why should you do it? Why do people do this? Well, number one, to get a lower interest rate. All right, so you've got to make sure that refinancing will save you money in the long run more than it costs you. Number two, people do it to reduce the loan term and become debt-free faster. So you go from a 30-year mortgage or an adjustable-rate mortgage to a fixed rate, 15-year mortgage, for example, and that can get you a lower interest rate, shorter mortgage payoff, get your house paid off sooner, double win.

Another reason people do it is to get rid of PMI, private mortgage insurance, and that's a great way to pay less on that monthly payment because you're not paying the lender anymore and it really just protects them in case you foreclose. And lastly, like I mentioned, you're switching the loan type. A lot of people have an adjustable rate mortgage and maybe they want to go to a fixed rate mortgage. That would be a good time to refinance as well to avoid those rate fluctuations. So for everyone out there, here's the question to ask yourself, how much will my interest rate go down, how much will it save me, and what will I pay in closing costs?

and closing costs can run about 2 to 6% of the total amount you're borrowing, depending on your situation, where you're at, all of that. So here's the deal. Simply, only refinance if it gives you a lower interest rate and saves you more money than it costs. So an example, if you save $2,500 a year refinancing, but you have $10,000 in closing costs, it will take four years to break even before you start saving money.

So refinancing is only a good idea if you plan to stay put long enough to save money. So that's kind of where you've got to weigh it and go, right, you know, we do plan on staying here long enough to get the ROI on this. So it's that simple. Here's six steps. If you're ready to do this, crunch the numbers to see if it makes sense financially. Number two, you've got to shop around for the best interest rate. Three, you got to choose a lender.

Don't forget to ask about those closing costs, the fees, the prepayment penalties. A lot of them will lure you in and go, oh, we're going to give you a great rate. But then they ding you with all these fees on the back end to make up for it. Don't fall for that one. A little bait and switch. You love that term. I was looking for it. You helped me out. I got there faster.

Quick to the draw. You are. Cowboy Camel here. That's it. And number four, you got to lock in the rate. Five, you'll go through the underwriting process, just like you did when you got the original mortgage. And then six, you close on the new mortgage. Good for you.

So here's the deal. If you need help, you've got questions with this about refinancing. Do what I do. Reach out to our Ramsey trusted friends at Church Hill Mortgage. They are experts in this. And you can go to Ramsey Solutions.com slash mortgage or click the link in the description. if you're listening on YouTube or podcast. Quick and painless, Ken.

This is why I like when you talk nerdy. I mean, we all need a little nerdy talk. Some people fell asleep at the wheel. I don't think so. In that segment. I think you laid it out beautifully. Some people were so riveted. Yeah.

I loved it. I thought it was very helpful. So there you go. And by the way, he mentioned it very briefly. I got a call back to it. This is why you want to go to George Campbell's YouTube channel. He's got all kinds of really fun and it's made for YouTube. We break it down for the people.

You break it down, you make it fun, you make it palatable. No matter what it is. We make it palatable. That is true. Marissa is up in Vancouver, British Columbia, a place that I want to go to, but have never been. Marissa, how can we help? Hey, thanks so much for taking my call. And, yeah, they call it the most beautiful place on Earth, but it's also the most expensive place in Canada to live.

Oh, there are you. Yeah. So I'm 28 years. years old and I've saved $200,000 for a down payment and I would really like to take that step. But I have two options that I'm considering and they're very different and I am stuck and would like your opinion on which one you would choose. Okay, here we go. Give us the details on option one first.

Okay, so option one. My mom sent me a listing for a house a week ago and I haven't really been looking serious. but basically it's a detached home on a quarter or on three quarters of an acre. It's behind a provincial park in an area that's a lot, it's a lot more rural. So it's $720,000 and it's very rare to be able to find a detached home within about two hours, three hours radius of where I live for under a million dollars. So it could be a really great opportunity. I work from home, so the idea of being more rural doesn't really, it's not an issue for me. And I just, I love the house.

It would be absolutely perfect for me. It's older, but that's fine. I had such a good feeling when I looked at it. Okay. Option two. Option two. My parents have offered me the opportunity to build a second house on their property. my parents own two and a half acres.

That's a lot closer to town. And my dad is a construction professional. So he would be able to do a lot of the legwork himself. That would save us a lot of money. And they expect that the build would cost $400,000. And then I would pay for the build, and then we would work something out, but I would get that value of,

the property would become, would end up in my name. So I think we worked it out and I would, if I built on their property for the $400,000, I'd put the $200 down and then have a mortgage for $200, and I would own about 18% of their property. My conflict is that being able to build on my parents' property, means I would only have to have a mortgage for $200,000, and that lowers the amount of interest that I'd have to pay significantly. and I think I could probably pay it off in around seven years, whereas if I buy the house that's out in the country that I love that's ready to go right now, I am going to have to have a $500,000 mortgage, and I'm going to be paying it for the next 30 years, and that interest is going to amount to a lot more money in the long run.

Okay, so first and foremost, the last comment, you're like, I'm going to be paying it for 30 years. No, you're not. You can pay this down faster than that, okay? So just, Just have hope in that. Here's where I'm going to do option one, and I'm going to tell you why. When people build on family members property, there is a point that you end up getting stuck there. Because there is a, you know, are you married? I am dating someone, but I am making this decision independently. Sure, sure, sure. But I'm just saying, you guys get married, you have kids, he transfers,

jobs and suddenly mom and dad have strangers living on their property who are buying your house. And do mom and dad want that? And like it starts to the relational aspect. So if you do option two, number one, I would have a legal document and having new property lines drawn. And that's going to be better for resale because if someone else, if you have to move one day, someone else is going to come in and be like, well, I don't know. There's some document that they're saying 18% of the land, but it's some people we don't know. It's the girls' parents. And if it's, you know, part of the Part of the biggest issue is that we're not able to subdivide. Okay.

So I would be permanently tied to their property. Yep. So for resale, for resale, that makes it really difficult. And the resale, the reason I say that, though, Marissa, is I want freedom for you in your life emotionally. This isn't the financial discussion. And there is something that I hear from people when they live on family property. Sometimes it works.

So let me say that. There's a percentage that it works and it's fine. But there's also a level of, oh, my gosh, I have this guilt now because eight years later, we're moving to America. Like I don't know what I'm going to do. Mom and Dad, no one's going to buy this home because there's no property. Like, it really messes up the future. Financially, it makes so much

sense. I get it. But I think it attaches you to your parents. And even if they're great people and all of it, there is something there. It's a big portion of your net worth that is tied to this and there's an emotional element. Can I ask real quick on this point? Rachel's making a very good point.

Do you have siblings? I have one younger brother. And I think that makes it a little more complicated too. And Will's and she's got some of the property. I'm with Rachel on this one. I'm just curious, what do you want to do? When you called us, which way were you leaning before you said, I want your take? I change it based on the hour.

But the problem is that this other property that I'm interested in, it is unique. It's been on the market for a while. It won't be the easiest to sell either because it takes a special person to want to live where it is. Yeah, but that's not attached to no property. It's not my parents' property. And I also have to be, I mean, the thing is that my parents have said that if I want it out for any reason that they would buy me out, like they have other money that they could buy me out. So who would live in? If they buy me out and they rent it out, then they have to pay capital gain tax on that income and my parents will then be retired and then that's going to impact their pension.

So it does, it does get really messy. And I do have a sibling. So I need to consider my parents and what happens if they die. It's a mess. And how the property is split. Yeah, you're asking all the right questions. And remember this, Marissa. Dave said this on a show recently.

I was like, that's good. Talk about all the deeds. This is everything from, you know, divorce, death, addiction, drugs. I mean, like, I don't know, all the messiness of life that can happen when you're in a financial deal with someone, living proximity, you're home. I mean, all of it. So, yeah, if you guys. I have a deeper question, I think. I think we're going a different direction. Marissa, I'm just curious if the option one house was the same price as the mom and dad situation, would you even be thinking about it?

No, I would choose the option one. All right, let me ask you another thing. What if another house showed up 30 days from now that was closer to town or whatever, whatever, and it wasn't some old thing, and it was in roughly the same price, which one would you be in? interested in. Option one or this new opportunity? So I think that's what it's really attracted to me is the land value, like it's on three quarters of an acre. And it would be impossible to get something that price closer to town. I didn't ask. I wanted you to play the, so you're sort of answering my question. You really like the land option. Is that right? It's not the house. It's the land for option one. The house is very cute and totally suits me. I'm going option one. And financially, I understand, but you're in over 20%.

But yeah, you're in a wise position financially still. And Marissa, I think you can, I think you can take an, you know, four extra mortgage payments a year, what that does, you know, to calculate. Like, you can do this. You can pay it off. You're not going to be paying it 30 years. I think it's a cleaner, more independent way. It keeps, I just think it keeps it, it, it just keeps it clean. I would. And the whole idea with the land and parents, we've gotten this question more recently, I feel like this past year. And I get it. And again, some people it works, but most of the time it gets really messy from a legal standpoint,

a property standpoint, taxes. I mean, all of it. And you've done the research. I mean, I'm so proud of you as you're rattling all of it off. You've thought through it. But I think, I think option one. That's what I would do. Judge Rachel has ruled folks.

Was Judge Ken? I concur. Okay. I concur. There's a part of me that makes her want to tell her wait. There could be another problem. Yeah, yeah. That's fair.

She seems like a hurry. but I'm okay. She's done a good job.