That's today's show.

Let's get into it.

Hey, everybody.

I'm-- I was going to say I'm Clayton Morris but I'm not.

I'm Natali Morris and this is Clayton Morris.

You're listening to the Investing in Real Estate

show with Clayton and Natali Morris.

Clayton Morris is a little bit under the weather.

Yeah, I'm sick as a dog, so maybe it's--

He's got the Kathleen Turner voice.

So you do not want to be me.

I know you thought you were going

to be me by using my name, but you do not want to be me right.

That's going to get me nowhere at this point.

Today, we want to talk about how to calculate whether or not you

should refinance your mortgage.

Now this applies to anyone who owns a home

and has a primary home mortgage, but also

anyone who is an investor and has a mortgage

and they want to rethink that mortgage.

On your rental property.

Right.

As we're speaking, mortgage rates are going down.

So that gets people thinking, oh,

could I get a better mortgage?

We just saw Wall Street Journal cover story this morning

about interest rates helping out the housing market at an eight

month low.

So now might be the time to strike

if you want to go out there and get that refinancing.

But we want this video to be evergreen,

so you could be listening to it at a time when

mortgage rates are increasing.

In which case, we just want to make sure

that you know how to do this calculation.

It's pretty simple calculation but I think a lot of people

sort of think in terms of just monthly payment.

Like, OK, this loan can save me so much per month

and so I want it.

Which sounds like a great idea, but you

have to remember that when you're refinancing your loan,

it's the word, the part of it that's re,

doesn't really apply because you're not redoing one loan.

You're getting a whole new product.

You're going a whole new loan.

So you're just taking one financial product for another.

Right?

Right.

A lot of times people do it with different banks,

although a lot of times your own bank could do it.

And most of the time they will want to.

But you have to think of it like,

OK, let's pretend bank A gave me a mortgage at 5%,

but now rates are around 3.5%.

So bank B is going to offer to pay off bank A,

so you no longer have a relationship with bank A

and now be your mortgage lender, bank B, on a new product,

right.

A lot of times that's great because they're

going to look at what's left on the loan from bank A and say,

OK, you have $100,000.

I'll pay off bank A $100,000.

They're out of your life.

They don't exist.

Right.

Right.

Your new relationship is $100,000 mortgage with bank B,

right.

But what you want to look at is what's

your bottom line because, most of the time you

don't owe bank A just $100,000.

You owe them $100,000 and maybe some fees, maybe

an escrow account, whatever.

Right.

So they're going to look at that total payoff, which

is you owe them let's say 102.

Right.

Right, and then they're going to say, now you work for us.

Now your relationship, I own you.

Well, that's why we wrote--

Right.

And that's why we wrote our book,

"How to Pay Off Your Mortgage in 5 Years."

Shameless plug, link below.

But we've done this strategy a number of times with our home

equity lines and using one financial product

to say goodbye to the other financial product.

Right, but we're not talking about home equity

line of credit at all today.

So take that and--

Right.

--put it away.

Read the book.

But really we're talking about bank A and bank

B. Don't digress.

I'll go back to my cold medicine.

You take up your box of tissues.

Let the big boys talk.

OK.

So now we're talking--

So when is it--

--about bank B.

Let me ask you this question.

No, please let me finish the point.

OK.

Because I think if someone's trying to follow this,

and you go on a tangent--

I'm going to-- OK.

But go ahead.

OK.

Where was I?

The new product is with bank B.

Right.

And now you're $100,000 loan is instead of 5%, it's at 3.5%.

That means your monthly payment is now lower.

But most likely you've got a brand new mortgage

that is now 30 years.

What if you were five years into your relationship with bank A?

Well now your mortgage is 35 years, right.

So we talk about in our book how you're number two, your two

main enemies--

Interest.

--are--

Interest and time.

--interest and time.

So you're now winning the interest game,

but you're losing the time game.

You just added--

Right.

--five years back to your loan.

Now is it worth it?

Maybe, right?

Because you do want to pay the lowest amount of money

for money.

Right?

Question.

Yeah.

So now my question is.

Now you may ask a question.

When, Natali, is it worth it to refinance your home?

When is it worth it?

OK.

So a general rule of thumb is if you

can save 0.75 of a percentage point,

or between that and higher, then it will work out.

Right?

Then it's--

So between--

--worth doing.

So between 0.75 and 1% per month in the APR, then it's worth it.

So let's say you have a 4% interest rate

and the bank is offering you 2.25%, do it.

Right?

But here are some caveats.

You want to make sure that you're doing it in a home

that you're going to stay in long enough

to recoup the closing costs.

Because bank B is going to say to you, sure,

I'll take on that new loan, right.

You can now owe me $100,000 at 3.25%, right.

Awesome.

So let's pretend-- And I didn't do a proper amortization

schedule on this, but let's pretend

you owed bank A $1,500 a month.

That's your mortgage payment.

Mhm.

OK but you refinanced with bank B

and your new mortgage payment is 12 50, $1,250 a month.

So what are you saving every month?

What's 1,500 minus 1,250 is 250.

250, right.

OK, very good, honey.

So you're saving $250 a month.

That feels great, right?

But don't be misled--

But--

--by that monthly payment.

But in order to get bank B to do all the work of paying off

bank A and now doing all the paperwork to become

your new mortgage company, they're

going to have some closing costs, right.

Let's say the closing costs around $2,500 a month.

That's cheap, but not overly cheap.

So you take that $2,500--

Not a month, sorry.

Those are the closing costs.

You take those total closing costs, if it's $5,000,

use that.

But in our example it's $2,500.

So take $2,500, divide it by your monthly savings,

which is 250, right.

And that ends up to 10 months, right.

$2,500 divided by your monthly savings of 250--

OK.

You will recoup those closing costs in 10 months.

So then that seems like a no brainer, you should do that,

right.

Right.

Because you know how to tackle your amortization schedule.

You've read our book, right?

So then, obviously, you want to save that money.

You want to pay less money for money.

But what if you plan on moving next year

and that number is higher?

What if it's going to take you two years to recover

the closing costs and you want to move

next year because, I don't know, you're finishing college.

I couldn't think--

Right.

--of a good example.

So then you shouldn't do it.

So you just have to make sure I will be in this house long

enough to recoup that savings. ,

Right.

So you've lowered your monthly payment, great,

but don't be allured by that because closing costs can

be costly.

And a lot of times people don't pay attention

to those closing costs.

And I know in the case of ours, when we did ours,

and it was like what 8,000 or something.

It was like it was pretty high.

Yeah.

But we're in New Jersey, we have a lot of different fees.

Right.

In general, most places are not like that.

Yeah.

Unless you're in one of those high tax states like we are.

But a lot of times you won't know what the closing costs

are until kind of later in your discussions with the bank.

So really it might put a halt to your entire process,

so it'd be helpful to find out what those closing costs are

going to shape up to.

They have to tell you around what

they're going to be because of the new Truth in Lending Act.

They didn't always used to do that.

Right.

Just make sure.

You need that number as much as you need the new API number.

Those two numbers go hand in hand

so that you can calculate what you're going to save.

Now, of course, our suggestion to you

is to take that extra $250 a month

that you're used to paying, and now pay that to principal.

So you're accelerating the new loan more

than you would have been in the old loan.

Right.

Right, of course you want to do that.

But there are also other things that you

want to look out for as well, if you're going to do this.

And we're not saying you shouldn't do it,

you just want to be equipped with the numbers.

Right, so, here are some things you

should look out for if you are going to do this.

Yeah, so make sure there not some additional and extra costs

hidden in the loan that you don't know about.

Of course, the closing costs are going to be there

but let's just make sure there's not some other costs.

Go line by line.

What is this for $500?

What is this for 1,000?