Real Estate the Ramsey Way - My Mortgage Lender Wants Me to Refinance My Home—Should I Do It?

Episode Date: September 29, 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. Stephen is in Michigan. Hey, Stephen, how are you? Doing good, Dave. I'm doing better than I deserve. What's up?

So I got a question that I think I know the answer to, but I'm going to see what you're going to say about it. So bought a house last year in the interest rate is 7.375, and my mortgage was sold, and the new mortgage lender is saying, hey, we can save you some money if you refinance. Now, we're on the back half of Baby Step 2, my wife and I, and I have the money to pay off our car. It's approximately 6,600. And the mortgage lender says, I would strike now, why rates are a little lower, because if you pay that car off, that's the last piece of debt in my name.

You said your credit's going to start to drop off, and that'll start to hurt you. So I guess my question is, do I pay off the car or do I refinance and then pay off the car? What should I do? Yeah. Well, your mortgage lender only makes a commission when they sell you a mortgage. Right. So we know their advice is tainted in this case. This guy's pitching pretty hard.

He is. They are pretty aggressive with the calls. Yeah. Yeah. So that right there tells you that something's up, right? And so, yeah, I'm paying off the car and I'll get around to the mortgage later. Why did you take such a high interest rate alone? Well, we were living in big city.

I know, but that's above market. Did you have bad credit? No. Credit score is up for sevens. Yeah, 737 is ridiculous. I mean, the market for a year has been at six. That's weird. Yeah, so I don't know a whole lot about finance.

I've recently started learning everything and going through the financial piece and the baby steps. So I am making up for lost time. All right. Let's do two things. Let's answer your question in two parts, and so we get the whole thing, and that'll help you. And it'll help some people that are listening to. Okay. Number one, if the only choice is between paying off your car or refinancing, we'll pay off your car.

Okay. So that part's answered. And number two, the mortgage lender being aggressive is your hint that he's self-serving, not you serving. Okay. That's why they're calling back all the time and trying to make a commission. And so number three, here's how you calculate when you refinance a mortgage. Your break-even, you do a break-even analysis. All right, let's use an example.

All right, let's pretend that you had 737, and you could get $7.3.7, and you could get 637. That's a spread of one if you refinanced, right? And your loan balance is currently what? 380,000. Okay. So 1% is $3,800 a year. Correct. That is your savings. Okay. So if it costs you $15,000 to refinance and you recoup at the rate of $30,000. It's going to take five years to get your money back. Right. You follow that? That's called a break-even analysis.

How long before I break even with a savings of 3800 versus a cost of 15,000? If your cost was 7,600, you break even in two years. And everything after two years, you're putting 3,800 in your pocket. That one starts to make sense. Right. But 15 years doesn't make sense. and so what we've got to do is we have to figure out the closing costs and divide the annual interest rate savings into the closing costs and that number should be to maximum of three years

two to three years or less and so what that ends up telling us is the lower the closing costs and the greater the difference in interest rate when you refinance the more likely you are going to be to do it mathematically because the faster you're going to be. going to break even. I agree. Okay. And so if these rates drop on down, if we see some continued movement, and we've seen a little bit of movement in the last few weeks, we're 15 year right now is 5.86 on a 15 year. Okay. It's 5.95, you know, so it's only 10th of a point. It's just barely moving. It's just hanging around. But there's all this discussion around the Fed and all these other things right now. There seems to be some downward pressure. So I disagree with your guy that now is

the time. I probably would wait a little bit. But If you could save 2% right now and you can make your money back in two years, I'd refinance it right now, but not with your car money. Okay, yeah. So the way you do the analysis is divide your interest rate, dollars saved, interest dollars saved into your closing cost dollars, and that's your number of years to break even, and that number of years needs to be two to three years, maximum.

And so just to throw a few more stats at you guys listening out there and hearing this, the average home in America for the past 25 years has sold every 6.5 years, and the average mortgage only lasts 5.5 years. And so if you have a seven-year break-even on your refinance, you got screwed. Because on average, you're not going to be there that long. Oh, it's my forever. Oh, shut up. I'm giving you the averages.

I don't hear about your forever, nothing. Okay. So the deal is that you're not going to be. your refinance needs to break even in two years, maybe three. But as we see these rates slide down, and some of you're sitting in some six, even some seven percent interest rates, and we see them slide down towards five again, you're going to see that 2 percent margin, and that 2 percent margin is going to take a whole bunch of you and make this formula work to refinance.

Why would I, I'm asking for a friend, why would I pay off that car with that $6,000 bucks versus pay this thing off and lower that rate substantially. Because we've got to clear the cash first. The cash flow on the car payment is much greater than the $3,800. Good call. So I'm probably paying $500, $600 a month on that car versus... The average is $780 right now. Then the $3,800 divided by $12.

Okay. And the mortgage is going to be sitting there, and the car, it's like an impediment in this whole thing. It's like the fly in the ointment. I love that. And the mortgage is sitting there. I've got to clean up the mess so I can go work on and fine-tune the stuff that's not as big a mess. Yeah, okay. We don't mess with the fine-tuning while we still got baseballs being thrown through the window.

So if somebody clears the cars and they've got $35,000 in student loan debt, they need to clear the student loans. Before you go refinance your... Yeah, unless you want to roll your refinance costs into the mortgage, you can do that. Okay. But you don't need to drain cash to do it. Okay. Because, again, but only if you...

if you're breaking even then. Because you now owe more on the house by $7,000, but you're going to save $3,800 a month or $3,800 a year. So that you'll be back to two years. Two years. You come out ahead on doing that, even though you owe more, but you'll owe less when you're done. So all that works out mathematically.

But, oh, wow, a little bit of a barrel of fish hooks. But, yeah, that's guys and gals how you work your refinance calculator. And Churchill mortgage can help you with all that. we've endorsed them through all the ups and downs of interest rates over all these 30-something years they've been on the air with Ramsey and they can help you whether and they'll tell you the truth they're not going to do what this mortgage lender is doing to Stephen and just hounds you to buy something you don't even buy. I'll tell you my favorite thing when I called Churchill and said I missed it several years ago and refinance my house and the first thing the guy said to me was I need you to hear me say

I'm not going to take your money unless this works out for you in the end and so let me run the math on it and I'll holler back at you. And then he called back and said, oh, yeah, this is a great deal, X, Y, or Z. But that was the first thing is I'm not going to just make a sale on your back. I'm not going to take your money if this isn't going to work out for you and your family. And I was like, man, I'm all in. I appreciate that.

And just a little inside baseball guys, mortgage companies have been dying for the last three years because they existed for the previous 10 years, 20 years, on refinances. And refinances have disappeared as some of you're sitting on two and three. 2.37, and you're not going to refinance at a 5.8. You'd be dumb to do that. And so the refinance market has dried up, and they were living off of refinances. So a lot of mortgage companies have gone broke. And so that's where some of this pressure is coming from. And then you've got

people like, Rocket! Woo! Hey, guys, thanks for listening to Real Estate the Ramsey Way. Now, if you're here, you're probably thinking about buying or selling a house. It's exciting. And one of the biggest financial decisions you'll ever make. But you're You don't want to do it with an inexperienced agent who will rush you into costly mistakes, like the ones some of our callers find themselves in. You need a pro who knows what the flip they're doing and will keep you on track with your financial goals. That's why we only recommend Ramsey trusted real estate agents. These are vetted, hand-picked pros who actually listen to your needs,

guide you through the process, and fight to get you the best deal. To find a Ramsey trusted agent near you, go to Ramsey Solutions.com slash trusted agent. That's Ramsey Solutions.com slash trusted agent. Bobby's in Fresno. Hey, Bobby, welcome to the Ramsey Show. Thank you very much, Dave. How can I help? Appreciate it.

I've been listening through all the years, and I just wanted to reach out to you. I, uh, me and my wife recently paid off our house about three years ago, and we've been trying to save some money, and we got a hundred and six, I'm sorry, we got about 175,000 saved up. Cool. And we're getting ready to purchase another house. And so I was debating, because I was going to use it for a rental, if I should just go ahead and put the whole $175,000 down on it. The home is about $292,000. So it'd be, you know, over 50% down. But what I was concerned about is whether I should be investing that much into the one home or if I should leverage myself, keep maybe 50% of that and put maybe 75,000 on one home and 75,000 on a second home.

And when you start talking about rental property, really when you talk about anything, but when you talk about rental property, people particularly struggle with one issue. Here's the thing you have to remember. Debt equals risk. More debt equals more risk. More debt equals lower cash flow, less cash. cash position and more risk. So if you buy one house with 50% down, you have less risk than if you take out eight

times more debt and spread this over four houses. Because none of them are going to cash flow then. This one's barely going to cash flow at 50% down. I love real estate. No, you're full of crap. You've never bought a rental house. I own a bunch of them. Okay?

I understand. So don't flinch here. The deal is that they don't cash flow. All of mine are paid for, and some of them with repairs and vacancies don't hardly make money. So when you don't get a renter for four months or one doesn't pay for three months, or you put in a heat and air system, it's $14,000, or you have to put on a roof because it's leaking, and you've got to pay property taxes and insurance, even if it's paid for, you don't get a, a ton of cash flow unless you manage the property extremely well and you buy it cheap.

So this idea that the payment versus the rent is the cash flow is a naive formula and an incomplete formula. When you run an actual operating statement on an investment property, you have all these other expenses including lit loss due to nonpayment and vacancy and legal costs while you evict the people that didn't pay and all the repairs and all the stuff you didn't think of when you had this idea that you saw on the internet, I want to buy a rental house. So all that to say, I definitely wouldn't buy more than one, and you're not even going to like this, I wouldn't even buy one right now until you have the money. I'd pay cash for it or wouldn't do it. So I'd save up some more. You've done a really good job saving money,

but, you know, the grass is not always greener over the septic tank, man. It's just not. So I'm going to tell you, I own a bunch of rental property, several hundred million dollars worth. Most of it today is commercial. I think we only own about 15 or 20 houses now. We've gotten rid of most of the houses. But we make good money on them, but they're paying the butt to deal with. And I love real estate. As I said, I've got several hundred million dollars in real estate. I love it. I think it's a great investment. But it is an incomplete picture when you don't consider all the expenses. Yeah, because you got the hassle factor, regardless if it's in cash or with debt. But then you have the risk factor added to it. when it's leveraged, quote unquote. I mean, when your gross cash flow, if it's rented is a few hundred dollars, you're losing money every year. Yeah.

In that case. And so, and that's where you're going to put yourself if you leverage into a bunch of properties. And that's how people go broke in real estate. And then they go, well, you know, real estate's nothing as good news. Yes, real estate's an excellent investment, but it is an investment that requires a cash position in order to lower the risk of it. And when you lower the risk, your returns go way up. But that is required that you do this.

So our suggestion around here, Bobby, is we pay cash for investments. Real estate, businesses, whatever it is you're going to buy, I pay cash for it or don't buy it. And that slows down the speed at which you build your portfolio, but it keeps you from having to do it over from going broke. And when you go do all this leverage stuff, if I'm going to go buy six houses with the same money I could have bought one, one with. And, you know, you've lowered your cash flows dramatically, increased your risk, dramatically. And one little California up evil where you are, and you got a serious problem on your hands in. So I probably didn't talk you out of it because I think you've got to kind of been, you got TikTok real estate fever. We called in to ask, can I put less down? And you said,

you've got to put more down. But the good news is you saved up 175 grand. I think that's amazing. So here's the filter to look it through. I need to save up 120 grand more. I'm 120 grand short of gold. Yeah. That's a solvable problem. But he's already picked out of house, and he's already got the fever. So I doubt I'm talking to him out of the tree.

He's already seeing real estate mogul in his future. I'm talking to the rest of the people listening. Oh, man. Maybe get one of them out of the tree. But you guys get up in the tree. You can't get them out. But I hope, Bobby, you'll wait. If I could convince you that I love you and I want you to win and I want you to own real estate,

and I think you did really good getting to 175, and I could convince you that if you'll go slower, you'll have a much greater rate of return over the long haul. That's what the data tells us, and that's what my life story tells us as well. For those of you that don't know, I started from nothing. I bought my first piece of real estate when I was 21 years old. I borrowed as much as I could borrow on all of it up to my eyeballs because I was the leverage king. you think you know something about leverage? I had you dialed in.

I could borrow money from people that borrowed money. It was unbelievable. I had $4 million worth of real estate by the time I was 26 with a $3 million debt, a million dollar net worth making $200,000 a year in 1984. And that portfolio bankrupted me.