3 Ways of Thinking About Choosing the Right Time to Refinance

Is now a good time to refi, should you wait? It's an important question to get right. In this episode, we discuss our approaches to assessing what needs to be in order to refinance a property with a desirable result. --- Transcript   Emil: Welcome back for another weekend wisdom episode of The Remote Real Estate Investor. My name is Emil Shour. And today I've got,   Tom: Tom Schneider   Michael: and Michael album.   Emil: And we are going to be talking about when is the right time to refi a property, whether it's an investment property, or even your personal residence. So let's hop into this topic.   Alright guys, so important question when to refi. There's obviously, yesterday, yesterday and last night yesterday, today, today, I actually refi every single month alone just keeps going up. But I keep refining. So it's all good. There's advantageous times to refi and less advantageous times refi. And sometimes, you know, you can grapple with Oh, is now the right time. Should I wait. So let's talk about when you guys have personally reified. any examples you want to start with?   Michael: Go ahead, Tom.   Tom: Go ahead. Michael, you hit the buzzer first, I saw you hit!   Michael: A nice gentle nudge back! So I recently reified my primary residence, I did a rate and term only refi. We didn't do a cash out because the rate would have gone up quite a bit. So we were able to get down I think a full percentage point for basically free as they call it. So I just paid like escrow and closing escrow and title fees. That was like, I don't know, 1200 bucks. And I think I saved 150 a month was doing that. So that was kind of a no brainer in terms of cost to pay back benefit.   And so we just saw rates going down like crazy. And so yeah, let's jump on it. So did a refinance. If I had been able to, I would have absolutely done a cash out refi. Because basically, so I'll just I'll put it out there for everybody. So we were at a 3.875 when we bought our place like two years ago, just over two years ago, which was great at the time, we were super thrilled with that rate. And then COVID, hidden rates started plummeting. And so we locked in a 2.875 on our primary. And so the cool thing is that we've talked about it on prior episodes, that investment property rates on loans traditionally, are about 1%, spread higher than your owner occupant rate. And so what's really great to do is if someone has a lot of equity in their home and their primary, they can do a cash out refinance, borrow money at a much lower rate, and then use that money to invest as opposed to somebody else who's has an investment property with a lot of equity, they do a cash out refi, that rate is that money is going to be at a higher interest rate. And so it doesn't go as far your purchasing power is a little bit diminished.   But again, I didn't do it wasn't an option for us. So we didn't do that. But if I could have I absolutely would have.   Tom: So was it a strictly a rate decision? Like once the rate got to a syllabus certain level you're like?   Michael: Exactly, yeah, so they got to certain levels, we pulled the trigger, I was in contact with that same lender, and actually rates had dropped again. And so we were going to jump on it and do another one down to like two and a half. But then by the time we got around to doing it, then rates had tick back up. So that wasn't really a feasible option anymore. So we're still at a .2875, which is still great, very happy with that rate. Of course, less is better. But it just has to make sense. And so we could get down to a 2.75. But for the 1200 bucks, that's like I don't know, 12 bucks a month savings. So it just wouldn't really make sense for us at this point in time.   Emil: So for anyone who's done a refi or just got a loan, you know, loans aren't free, refunds aren't free. So typically one or two things happen. Either you pay up front to do the refi, you pay all the costs, or they roll it into your loan value, and now your loans a little bit higher than it was before the refi. So I'm curious, do you typically roll it into the loan? Do you pay out of pocket? How do you like to do it?   Michael: Yeah, so it depends for this one, because the amount was so small, we just paid it out of pocket, so that we could be done with it, you do the thing you think about is you're paying interest on those loan charges if you roll it in, and so you don't feel it out of pocket as much. But we were in a position where we had the reserves, we had the cash savings, we said let's just let's just pay it as opposed to financing it.   Technically, if we looked at the math, I mean that 12 $100 charge we rolled it in would be at 2.875% interest over that 30 years. So if we look at the total interest accrued over 30 years, yeah, that's gonna be a lot more than 1200 bucks. But also, if I could take that 1200 bucks, spend it elsewhere and get a better return than 2.875%. That would be a better use for those funds. But I said, Yeah, you know what, it's okay, I'll just pay it at a pocket and kind of be done with it. Keep the loan amount reasonable. Not that 1200 bucks on a several $100,000 mortgage is unreasonable. But you know what I'm trying to say?   Tom: I've done a couple of reef eyes lately. And similar, you know, that question you're asking me, you know, did you roll the costs into the loan, and I did roll the costs, and I live in an area where the property taxes are pretty high. And it was part of the closing costs, they wanted some money for the taxes and yeah, so I just I like, you know, to have the property taxes that were, you know, part of the cash to close in escrow, you know, added into the loan, and got some financing on my 2020 property taxes. I just rolled them right in!   Michael: That's really great.   Tom: And I'd like I didn't think about it until after it happened. I'm like, oh, wow, I just got financing on that. So, on the original topic of conversation on, you know, when thinking about reasons derive without refi, I think there's a couple of elements to it. One of them, like Michael is, you know, if rates dropped to a certain level, and it's like, wow, just significant savings on your monthly payment, awesome.   The other is, if you get anything, this is most extra relevant with rental properties, I think, maybe not, is you just if you have such a surplus of equity, so your loan to value is really high, that you can redeploy that equity…   Michael: Other way around your loan to value is really low!   Tom: Your loan to value is very low. So if your loan to value is really low, so you know, quickly define that is, some of the the total loan amount divided by the total value of the property. If that value is smaller, say like 50% 40%, whatever, you can cash out refi, as what Michael was talking about before, so I think it's kind of a it can be a combination of both the environment that we've been in like recently with rates dropping and homes appreciating, it's kind of like a superstar refi situation where you have that option to cash out refi if you want to as well as lower your percentage of rate.   Now, if your cash out refinancing, your monthly payment is probably going to go up, because you're increasing the amount of debt. But if you know, if the cost of that debt is cheap enough, you might be neutral to what your monthly payment is, which is kind of a super homerun. So those are the the two main considerations that I'm thinking about is where rates are moving, and the amount of equity that you loan to value ratio, LTV.   Michael: And your payments likely going to go up unless your name is Emil, sure. And then your payment you get a ton of money in your pocket tax free and your payment stays the same.   Tom: Did you negotiate that Emil?   Emil: No it was just so… like Michaels talking about it was it was on a previous episode. Basically, I bought this property in Indianapolis like three, four years ago, Indianapolis has had awesome appreciation, the values gone up. And my rate at the time, the current rate was about a point and a half less than when I bought it three, four years ago. So I could, I basically did a full cash out refi of my entire original investment and a little bit more. And my payment only went up like 29 or $30 a month because my rate dropped. So it was it was awesome. I didn't have to do anything, just rode appreciation wave and still cash flows well, great property. So that was the example Michael gave out.   So in that scenario, there's no reason not to refi it right, like rates looked low, I saw values were going up like crazy, did the math was conservative of what I thought the home would be worth, the appraisal came back even better. So it was just an absolute no brainer to to why not just pull the cash out. Cash Flow is not going to be affected too much lower my rate, all good things. So that one just felt like a no brainer.   I had another situation like you, Michael, I refinance my personal residence, I actually ended up doing it twice as well. So the beginning of 2020, rates were low. So we refi because it was going to drop our monthly payment like 150 200 bucks, which I will happily take. And then we did again towards the end of 2020. Which dropped, you know, we got to 2.875, which was I think was like point seven, five or a full point cheaper than what we had before. So all in all with those to revise our monthly payment on our primary went down $700 a month, which is amazing. Amazing. So…   Michael: And how much did that cost?   Emil: So I did the same as Tom, whereas I just rolled them in. So basically, so here's the thing, we took out a loan two years ago, and with the two reifies, because in the beginning, you're paying basically all interest, our loan is basically the same as what we bought it for two years ago. So we didn't have any additional equity from pay downs, because we kept I wish we only refied once but who knew rates? Were going to go down twice, but I will take a $700 drop in payment any day of the week, even if you know my equity stay the same. That's fine.   Michael: Right? Right, man, that's incredible. Yeah. So something else to think about. And Tom, you were kind of alluding to it is, when you're looking at or considering at your refinance, you should look at what your loan term is how much life there is left on that loan. Because you know, just like you mentioned at the beginning of the loan, if you look at the amortization schedule for that loan, you're paying mostly interest, your principal is getting reduced infinitesimally small in comparison to the interest. So if you're at the end, the tail end of your loan, you're paying a ton of principal down, you're gaining a ton of equity every single month versus at the beginning. You're barely inching forward. So that's an important consideration too.   So I would say if somebody is at the end of their loan and rates have gone up as compared to where they are, but they have a ton of equity. Consider a HELOC. This is a really great way to tap into the equity without changing the loan structure that you have existing.   Because Tom, like you mentioned, we got this supercharged refinance ability here with that values have gone up and rates dropped. So that's really powerful for us.     But if we see that, you know, rates go up, and we still happen to have a lot of equity in our property because we've owned it for a long time, we might not want to cash out refi into a less advantageous product, or a more expensive product. And so that's where HELOC can be a really beneficial tool to utilize in the arsenal.   Tom: Yeah, love a HELOC. If you hear construction in my background, that is the HELOC at work. The sound of HELOC.   Emil: You guys both have the same middle name and it's HELOC, you love the HELOCS.   Michael: We love them. The thing of it is talk to anybody that's used one they'll sing their praises. I don't know anybody that has one that's used it that's like it’s ok. Okay, like everybody I know who has one loves it.   Emil: Very true. I have yet to use one. But I'm looking forward to using it at some point.   Tom: Oh, man, I thought of a good non related question. What's something else that people when they use it? Just like love it?   Michael: It’s the best?   Tom: Yeah, yeah.   Michael: A sous vide.   Tom: Sous-Vide is great. A Traeger is also a very highly…   Michael: highly revered!   Emil: The Oculus blew my mind when I tried it for the first time like six months ago. Like everyone who tries the Oculus VR it is it's very cool. The first time you try a virtual reality headset, like I was blown away pretty amazing.   Michael: As long as you don't have vertigo, it'll be a lot of fun for you.   Tom: They fixed some of the vertigo stuff because like, it's what I've remember in talking to someone who was smarter than me, and obviously on Oculus and a bunch of different stuff, when you're turning your vision like knows to like, create gaps or something but when you turn with an Oculus, like it's almost like too much information. Okay, I'm gonna I'm totally butchering this, but anyways, yeah, vertigo, Oculus.   Michael: So people with vertigo can enjoy the Oculus, or people with vertigo, just avoid the Oculus.   Tom: What you got to do, Michael is what you got to do is go listen to this episode, you gotta slow it down a little bit. And in between my uums and pauses. A lot of good information there.   Emil: You gotta get the Tom translator out.   Michael: Yeah, play it backwards… Oculus is best for people with vertigo.   Tom: The issue with Oculus is the vestibular view!   What were you looking at in your Oculus?   Emil: My brother in law got one. And I was blown away with it. I bought one. It's funny because like, you try it. It's amazing. I haven't played video games in play a decade. And I was blown away. And so I bought it. And I was using it. Like on the weekends for like a month, month and a half. And now I use it maybe once a month. It's one of those things that it's so cool blows your mind and then the novelty quickly wears out. And you know, as much or I don't know, maybe I just got busy and I just don't played as much but it's still really cool every time I pick it up every once in a while.   Michael: There is a balance beam one that I saw where you like walk out on the skyscraper balance beam and then my father in law, that'd be funny to push me. And I was like screaming as I was standing there, but following in my head. It's pretty wild.   Emil: It tricks your brain very well.   Tom: The videos of people like running into walls are   Michael: So good. When we first came out they had to introduce the strap for the wrist because people were just breaking all their TVs because like throwing   Emil: That's right. You got to play to padded room.   Michael: Yeah, this really got off the rails guys. Nice work. Emil: All right. Welcome to the technology investor, the remote technology investor. Alright guys, anything else to add on the topic of refinances. Before we head out?   Michael: The last thing I'll say is that with the rates being what they are now, you know, who knows about what the Fannie Freddie changes are going to bring for the world but I think a lot of people look to new acquisitions to make better cash flow when oftentimes just re optimizing their current portfolio via refinancing can make a lot more sense and can often be a lot easier so I'm that's what I've been doing. As of late looking to do more with less I encourage other investors to do the same as well.   Emil: Yeah, can you imagine having just this massive portfolio and rates just bought them out to historical lows and you know, you refi and boom, you just make more money? It's amazing.   Michael: Yep.   Tom: My last tidbit will be on the refi piece is making sure that if you're going to do it, like make sure there's enough meat on the bone like I am doing like a burger or something like that, making sure that if you're going to refi you know you're you're making it worth your while so you know they bought a property for $100,000 like I wouldn't refi it and tell theirs, I could cash out a good you know 25k or get my at least my original downpayment back and that's probably a different number for everybody. But in doing a refi where you're doing a cash out, you know, it's going through that exercise might not be worth it. Unless there's a huge rate drop if you're doing a cash out refi unless you get you know, a good good chunk of money.   Michael: Like $700 a month savings.   Tom: No no for the actual like cash out. So like getting a good enough bump on equity would be my 10 cents.   Emil: Not two cents?   Michael: The full blown dime!   Emil: Nice, 5x Tom. Alright guys good episode and I will catch you all soon. Happy investing.   Michael: Happy investing.   Tom: Happy Investing.

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