HS 006 - When To Refinance With Casey Fleming
- What is refinancing?
- What are the different mechanisms by which somebody can refinance?
- What is the refinancing process like?
- How do you guide your clients when going through this process?
- What are the valid reasons to refinance?
- Other reasons somebody would refinance?
Read our Interview Below!
Your listening to homeschooled, simplifying real estate education for buyers or sellers step by both large and small, if you’re here looking to learn the ins and outs of buying or selling real estate you’re in the right place. Get killer resources for free training and step by step guidance go to homeschooledpodcast.com. Now here is your host – Robert Musallam.
RM: Welcome to home schooled, I am your host Robert Musallam, on the show today, we have lender and author Casey Fleming author of the loan guide how to get the best possible mortgage is on the show today to talk to you about refinancing and when is the best time to refinance for your goals. He is a 35 year industry expert, he really know what his talking about he gets down to the nitty gritty and analysis with refinancing and how to help you in the long term by choosing to or not choosing to refinance so pay attention, there is good tit bits in there for everybody who is in that boat, so without further ado let’s get to our interview with Casey Fleming ….
RM. Alright so for this, for anyone who hasn’t heard your first episode with us give a little background and bio on yourself?
CF: Sure, Been in the mortgage industry in one capacity or another for more or less than 36 years and as a result of that experience and after the financial crisis I set out a few years writing the book ‘The loan guide on how to get the best possible mortgage’ as a way of educating consumers of the protect themselves against bad practices.
RM: ok, and again that book is available on the show notes via Amazon. Casey we wanted to bring you out today to talk about refinancing, so for somebody that has never heard the term before can you explain what refinancing is?
CF: Sure there’s 2 different purposes to refinancing, 1 is to save money and the other is to broadcast out of your home and those are very different things than generally when people think of a one to refinance whether thinking of is that while want to replace their existing mortgage with a new mortgage in order to save money.
RM: Ok, and so let’s talk about the different ways in which people can refinance?
What are the different mechanisms by which somebody can refinance?
CF: It is really simple, if it is your purpose to save money main thing is to replace an existing mortgages or mortgages if more than one with a new mortgage, so you will go to a bank or to a banker of mortgage banker mortgage broker and start that process.
RM: Ok and what is that process like?
CF: So the first thing that you would want to do is, to figure out is if you qualified and there is a normal qualification process which isn’t any different to when purchased your home or is been a very long time since doing that since things are different today, the other thing is once you understand your costs and interest rate is going to be on the new loan, it is very important to take time to make sure to spend time figuring out whether not actually makes sense for to do so and actually save you money.
RM: ok, Just wanted to take a step back, so it’s much like purchasing a house the first time so it is the scenario by me owning a house I am not allowed to refinance simply because I don’t make enough money, is that factual that I couldn’t refinance a home?
CF: Actually yes its possible and it happens all the time now if from back and your loan was written back before 2008 for instance and it was an interest only loan whether they qualified you on interest only payment happened back then, today by using a fully advertised payment and I knew I had a couple of tragic cases where I was not able to refinance someone out of a loan where the payment was ballooning up.
RM: Wow, ok that is interesting, well the consumer kind of feels because he owns the house then why wouldn’t he be able to refinance and then sometimes you just not able to.
CF: That’s correct , senate has that while the house I want him to refinance its interesting than the basket case and sometimes your income has gone down substantially lower credit has gone sour and an d those might also prevent you from refinancing and the tragic circumstances but it’s very difficult to get out of them
RM: ok, so let’s assume that we have, good credit, good income, um you know, I wanna save some money, right, what’s the process? What do I have to do? How do you guide your clients when going through this process?
CF: well once you have established that you’ve qualified for a new mortgage, the next step is to actually know what the new mortgage is going to cost in upfront fees and interest rates. We hear a lot today about no cost loans or no point loans, no point fee loans, the important thing to understand is a lot of folks that work on your loans so, and they all get paid, no one is working for free, so intuitively you know that there is no such thing as a no cost loan, but the costs can be financed in different ways including finance in the interest rate so um the first thing you want to establish what is the real cost to you in terms of how much is it going to cost me upfront and how much is it going to cost me in interest every single month and then that’s when you compare it to which you currently paying to decide whether or not that actually makes sense.
RM: In my view of the refinance it is I’m just saving money every month is that not the case for the am I the only doing this to save money on a monthly bases or is there a larger number than it should be focusing on when I’m calculating whether to refinance or not.
CF: It’s much more complicated than your monthly payment, although that how mortgages are sold on a monthly payment just like cars or anything else, the problem is when most folks go to refinance a 30 year fixed mortgage and have paid for five years with 25 years left to pay and when they go to refinance it they add on 5 years onto the back of the loan and if you can account for those costs over time, you are actually paying more for the new mortgage than having just making payments on the old mortgage.
CF: So one of the things to consider when you taking a look at it is that the most common way that mortgages are sold is for refinancing is something called the payback analysis they will sale huger costs let’s say it’s $3000 for the loan and your mortgage payment is going to go down by let’s just say $100 per month than you’ll get that money back in 30 months after that it’s well nonsense because what happens is you have added five years to life of the loan first of all and second of all with the new payment less is going to principle and more of it is going to cost because you starting over from scratch.
RM: ok, and so you know is what are the valid reasons to refinance them
CF: Well that may still be a valid reason to refinance my days and easy fix for the flaw in the payback analysis and that is , what you can do is, you can take your new loan payment that went into a dozen other basic 30 years, if you have 25 years left to pay on the loan, you simply ask the loan officer what payment would I need to make order amortize this over 25 years instead of 30 years and compare that payment to the amount of money that the loan is going to cost you and if this does make sense for you, the payback period going to be longer that it would be for a 30 year fixed payment, but if the payback period still makes sense to you, that’s when it would make sense to refinance.
RM: Got it, so so if wanted to run this analysis, I would simply ask my lenders to calculate what the amortization rate would be over the time I have left, so if I have been paying for the last three years then I ask for 27 years, right, is that accurate?
CF: That’s Correct
RM: And is that an additional payment made every month of considerable said to the balance or is that something that you you’re asking to refinancer to make it a 27 year loan?
CF: oh that is a good question, there are quite a few lenders now offering custom loan periods where you can even do whatever period you want exactly, doesn’t even have to be an even number, exactly per year, and could even be 27 years and three months. B… laughs…. Here’s the funny thing about that they offer no cost reduction at all in a 30 year fixed and in some cases even charge a premium when it’s a loan for 27 years and if your goal is to pay it off in 27 years unless you simply know that you actually don’t have the discipline to make the minimum payment necessary to amortize it over 27 years.
RM: Got it, well I did not know you could ask for a loan for any amount,
CF: Yes …
RM: and that’s interesting
RM: And I know they quote even 10, 15 and 30 years, cos those are the standard numbers right?
RM: um so even home purchase, can I do the same thing or refinancing different?
CF: You know I haven’t seen them used on purchases
RM: I’m not sure why anyone would want to, I want to do this for 26 and a half years, make it happen
CF: I can’t imagine either, I’m sure the same lenders that offer the odd amortization periods on revising probably offer them on purchases to I can’t imagine why they wouldn’t
RM: What’s another reason why somebody would refinance?
CF: Well people also refinance to either pull money out of their house to access their equity or to lower their monthly payment, can I talk about that first cos I wanna make a distinction between lowering payments as opposed to saving money. Most folks think that when lowering a monthly payments they are saving money that’s why that isn’t always the case. Sometimes people just need to lower the monthly payment. I will give you an example I had a client, an elderly woman who was routinely having a very difficult time living, she had retired, her retirement income of didn’t turn out to be as much as she thought it was going to be the home she made enough to make her monthly payments, her credits were perfect, so she was able to do it, and she was living by thread every single month so she came to me for refinance, now she only had 12 years left to run on your mortgage, but her feeling that she had 20 years frankly left to live, so she didn’t want to live penniless for the next 12 years, in order to get the loan paid off, so she asked me for a 30 year mortgage and I was able to give her the 30 year mortgage, cut mortgage payment in half and she knew that it was going upfront to extend her mortgage payment forever for all practical purposes for her, but that wasn’t important to her, so she understood that she wasn’t really going to save money over her lifetime entering the refinance and that what she was going to do is get the breathing room every single month that she needed so can buy groceries and not cat food.
RM: So there’s a lot of case by case analysis that goes into this right um that particular story might not be everybody, but most people would kill to have 20 years of their loan paid off and have that type of equity to tap into, but that makes a lot of sense that you have a lot of options when it comes to refinancing.
CF: The most important thing is to really examine what is your goals and what is it you trying to achieve and how we get there and what it costs of doing so, for this woman in particular was an example of somebody who understood that in the long run is gonna cost a lot more and that the benefit was something she really needed.
RM: ok, ok, is that is that what summarizes everything on the savings side of refinancing?
CF: Yes I do.
RM: ok, so let’s talk about the other half right, cause we all know the other half, the cash out folks, were they for good or bad? Let’s talk about the good and then the bad…
CF: laughs, ok, when it comes to pulling money out of your home or accessing equity concept called; good debt; bad debt, that has been around for years of it is often used incorrectly to justify in using money from your home, pulling equity from your home, so mortgage debt is good debt cos its tax deductible and it’s a debt against an investment which is your home and other kinds of debt are bad debt, but it can be misconstrued that as long as it’s mortgage debt its good, but that isn’t always true, so I think it’s good when acquiring a home, and its very good on the more satisfying than especially if you get the right kind of loan, when people pull money out of their home, there’s different purposes for doing that, in my opinion it is fine to pull money out of your home in order to do remodeling or expansion as long as it’s done intelligently and is also probably a good idea to pull money out of your home to invest in income property, what isn’t a good idea in my opinion is pulling money from your home buying things that are not related to investing in your home or other real estate. Do for instance many folks use an equity line, and we can talk about the various ways to pull money out of your home, but most folks use an equity line to pay for a car.
And the problem with equity line is that its structured is that if you make minimum payments it will take 25 years before it’s paid off and I am pretty certain depending on the kind of car you buy, it should be done long before 25 years has gone by so in my opinion the reasons are problems because are financing the asset for much longer than its useful life. What’s even worse is debt consolidation, folks use debt consolidation and the way its sold is there told, well you can drop your, right now you paying $2400 a month for your credit cards and we can drop that to $200 a month so you saving $2200 a month. Well no you not, because well with credit cards you will be paying them off for few years until you stop using them and then you you will be done with them, but if you borrow that money on a 30 year fixed mortgage for instance and now it’s not like financing your car over 25 years but you financing you shoes over 30 years and it’s a terrible terrible financial move.
RM: ok, so we’ve kind of discussed purchased of good debts, so we talked about good debts as remodels that would presumably add more value to your existing property.
CF: or probably invest in Investment Properties which I have done myself,
RM: ok, and even then that’s kind of walking the line, right? Buying another property with existing money that you may not have complete access too, because at some point you would have to pay off that money as well as finance the new debt.
CF: yes there’s risks and downsides ok, we that it’s very important consumers understand before they move forward but it can work out very well.
RM: ok, we kind of touched on the bad, but what are some of the bad things you have seen in the industry, we were talking about buying cars, what is the worst that you have seen on the bad side.
CF: Well I think the worst was some again sometimes client stories are really useful, there was a client came to me who had a lot of credit card debt and she wanted to use her home to refinance a mortgage or consolidate the credit card debt, but the high balances on your credit cards were lowering your credit score so she didn’t really qualify for a mortgage that was very attractive I tried to talk her out of it, frankly she was on a fixed income and she was going to most likely loose her home, was going to have to sell it, um she wasn’t in foreclosure yet, so we did the refinancing, we did the debt consolidation, I made sure I counseled her so that she understood what the implications or anything else thought we had an agreement on six months after we did that consolidation on she came to me as for another debt consolidation because she had went out and bought a BMW 740. B: Laughs…….and she was having trouble making the payments it was a perfect example of somebody who use the equity in their home for the wrong reasons and then did it again.
RM: so, was this very common back in 08/09 where you would get multiple requests for finance from the same people?
CF: it was extremely common, I would not do a debt consolidation loan equity access loan or on equity line before first talking to somebody making sure they understand what they’re doing an even so there were times when people came back to me again and want to do it again and pull money out again and again and again and usually when it came at a second time I would turn them down, they could go to one of the banks and all day long I just wanted to want to write, essentially write a determined foreclosure.
RM: ok, right, right. And not to get overly political here but what is the allowable time period, is there a grace period that you have to wait that the government requires for you to get another refinance, or could you do it once a week… laughs
CF: Well since its takes 30 to 45 days to do it, you can’t do it more than that, but back in the early 2000, when a loan officer, when they met you to sign off your loan papers to bring a new application really, B…. really, CF: yes Really, it was stupid, awful living practice, even today there is no time limit at all, if the ink is still drying on the loan papers you can apply for another one.
I wouldn’t recommend it,
RM: yeah that is insane, alright Casey, anything else that the consumer need to know about refinancing?
CF: Well the one thing that I would like to address is when you do pull cash from your home let’s say to do home improvements, go back to the concept of never financing anything for longer than its useful life gets a little complicated than generally is what happens for most folks when they decide they need roof, let’s say they need a new roof, when you need a new roof you need a new roof, you know if its leaking you need a new one, and a new roof is expensive, often times when folks need to use their equity to be able to pay for something like then thats the time when they look around and see what else they would like to do, we need to paint, need a new kitchen, a new furnace invariably in those circumstances we will go into new 30 year fixed mortgage the problem is some other things that are going to do, the useful life will last, the useful life will be less and less than 30 years, so for instance the exterior paint will only last for 10 years, appliances might last 15 years, new carpeting may last 5 years, so in those circumstances once again folks are in the financing of items with a shorter useful lives over 30 years which end is a horrible mistake the resistance from an it so complicated, but I can help them figure out what is the minimum payments after making order to pay everything off by the end of its useful life otherwise let’s just use appliance as an example, you use that a lot of money only in the fancy appliances and 15 years from now in so, you still owe what you paid for them because of financing or 30 years and are paying off or 30 years and now you have to replace them and you still gonna be paying for them to another 15 years, but now you buy new ones, and usually charge those on credit card will put them on a new home equity lines in and now you paying them off over 30 years, we call a lifetime financing meaning you never ever finish paying off for them…. Both Laughing
I like my customers to not do that to stay away from that, to understand, to know what exactly what they’re doing exactly what the lifetime costs are in an intelligent debt management plan.
RM: Ok, I think the real take away is regardless of what you are doing in the underworld, you should actually be shopping around and talking to multiple people to see how multiple lenders deal with your facts scenario ideas is a logical way to do it in this kind of friendly to do if I’m sure you’ll find all of the above when talking to lots of people.
CF: That’s true and nobody has the best deal in all cases as well so when you shop and multiple lenders, your neighbor might find a big bank that has the best loan for them, and you might find a mortgage broker has the best deal for you, or a regional mortgage banker so it’s very important shop, to inform yourself, to understand why are you doing this and to understand the long-term financial implications for you and your family.
RM: Fantastic, fantastic, Casey, thank you again, Casey is the author of “The loan guide, how we can get the best possible mortgage” , there will be a link to it on our show page, that will take you to Amazon, where you can get a copy of it if you like, umm Casey thank you so much.
CF: You’re Welcome, thank you
RM: That was our interview with Casey Fleming author of “The loan guide”, go to Amazon to get a copy of ‘The Loan Guide’ or click the link on the show notes that will take you right there and also visit his website on loanguide.com and get really cool interesting analysis there for some of you math’s nerds in our audience. That’s our show, if you happy with what you heard, please visit us on iTunes and leave us a nice review and we will read some of the good ones on the show. This is Robert Musallam, signing off.