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Refinancing Your Mortgage Is (Mostly) a SCAM! Here's Why... - YouTube
Channel: Malcolm Lawson - REALTOR
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so if you own a home at some point you
[1]
probably received a letter in the mail
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looks something like this
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a random online lender claim that they
[6]
can save you a hundred dollars
[8]
200 500 a month on your mortgage payment
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by refinancing with them but the truth
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is
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most of these letters are practically
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scams and today i wanted to break that
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down for you and explain
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why that is i also want to go over when
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it actually does make sense for you to
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refinance your home
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i'm going to share with you a simple
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formula that you can use on your own
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home
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determine if you actually would save any
[32]
money by refinancing at a lower interest
[34]
rate so before we dive into this i want
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to lay a foundational understanding of
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how your mortgage payment actually works
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so every month your mortgage payment you
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make to the bank is actually comprised
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of at least
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four smaller payments we call this pity
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p-i-t-i
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so the p in pity stands for principal so
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this is a portion of your mortgage
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payment
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that is going straight to paying down
[55]
your debt to the bank so how much you
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still
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owe the bank the i in pity stands for
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the interest
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so this is the interest that you're
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paying on the remaining balance that you
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owe to the bank and since your balance
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that you owe to the bank is getting paid
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off
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a little bit with every mortgage payment
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the interest that you're paying on the
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remaining balance
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is also reduced a little bit with each
[76]
mortgage payment now the t
[77]
in pity stands for your property taxes
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and the i stands for your homeowner's
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insurance
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you see your bank doesn't want the state
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to repossess your home because you
[86]
didn't pay your property taxes
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and they also want to make sure that
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your house has homeowners insurance on
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it
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since your house is the collateral for
[93]
your mortgage so they include that in
[95]
your mortgage payment and then they make
[96]
those two payments for you
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now when you first start making payments
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on a 30-year mortgage
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a lot of your first few payments is
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going to go towards the interest
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on the remaining balance and only a
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little bit is going to go
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actually towards paying down the
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principal but since every single
[112]
mortgage payment that you make your
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principal balance is lower just a little
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bit that means that the
[116]
interest that you're paying on each
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subsequent mortgage payment is also
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going down just a little bit more but if
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you have a fixed rate mortgage payment
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and you add up how much of that payment
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is going towards interest and how much
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is going towards principal
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the sum of those two numbers is always
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the same for every single payment
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but what changes is the ratio of how
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much is going towards principal and how
[136]
much is going towards interest so if you
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were to actually graph out your mortgage
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payment this means that at the start of
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your 30-year loan
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a lot of your mortgage payment is going
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to go towards the interest
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and it's going to slowly come down and
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then quickly faster and faster start
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making a lot more progress
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so it's going to have a gradual decline
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and then pretty quickly
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curve down in those later years of your
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mortgage
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and now at the same time how much of
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your payment is going towards principal
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does the exact same thing but in the
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other direction
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so it's going to have a slow gradual
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upward motion
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and then quickly curve upwards as more
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of your mortgage payment is going
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towards paying down the principal
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and as you can see you really want to
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get into the later years of your 30-year
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mortgage where more of your mortgage
[180]
payment is going towards paying down the
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principal
[183]
and you want to get out of these earlier
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years as soon as you can
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but what's funny is that the banks and
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your lenders
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actually want you to stay in these
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earlier years here
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where more of your mortgage payment is
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going towards the interest
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and less of it is actually going towards
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the principle so let's look at some real
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numbers here
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and let's say in 2010 you bought a home
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and you took out a loan for three
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hundred thousand dollars
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at four percent interest when you add up
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the principal and interest on all of
[210]
your mortgage payments it's going to
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come out to 1432 dollars a month
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and on your very first mortgage payment
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that breaks down to one thousand dollars
[219]
going towards the interest
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and 432 dollars going towards the
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principal paying down your debt to the
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bank
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now if you fast forward to today and
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you're now 10 years into your 30-year
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mortgage
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instead of a thousand dollars of each
[231]
mortgage payment going towards the
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interest which is the profit that the
[234]
banks make
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now only 787 of each mortgage payment is
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going towards
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the bank and now instead of 432 dollars
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of each of your mortgage payments going
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to pay down your debt
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you now have 644 dollars going to paying
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down your debt
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and instead of owing the bank three
[250]
hundred thousand dollars like you did at
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the start of the loan
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now you only owe the bank 235 000
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10 years into the loan and now let's say
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at this point you get a letter in the
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mail saying that if you refinance your
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mortgage
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they can save you 300 a month and let's
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just say it's at the exact same interest
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of
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four percent so let's look at what would
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happen if you actually move forward with
[270]
this
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so first off instead of you paying your
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mortgage off 20 years from now
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now you're starting a brand new 30-year
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mortgage on your remaining balance of
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235
[280]
000 and you're not going to finish
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paying that off for at least 30 years
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but if we look at it a little bit more
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closely we see that when you're 10 years
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into a 30-year mortgage
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644 dollars of every one of those
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payments was going towards paying down
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your principal
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and building you equity in your home and
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i look at paying down the principle and
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building equity in your home
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sort of like you're putting money into a
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savings account which you can't touch
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until you sell your home so you're
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essentially saving for the future by
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paying down your principal
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but now if you're starting a brand new
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30-year mortgage the amount of your
[313]
mortgage payment that is going towards
[314]
your principal goes down from 644
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down to 339 and this is where that 300
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savings is really coming from that your
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mortgage lender is promising you
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so it's not really saving you any money
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just instead of you
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building 300 in equity in your home you
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instead get to keep that money in your
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checking account
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but it actually gets worse than that
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because your new lender is going to be
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charging you closing costs for the
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privilege
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of refinancing your home and they most
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likely would just be adding these
[344]
closing costs to the balance that you
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owe on your mortgage so your closing
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costs include things like an application
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fee a loan origination fee
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a settlement fee a title search fee an
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appraisal fee a credit report fee
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etc and generally these add up to about
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two to six percent
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of the loan amount so the national
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average closing cost or refinancing a
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mortgage is 5779
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and this typically just gets added back
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to the balance that you owe the bank
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now oftentimes your lender may require
[375]
or highly encourage you to buy
[377]
points on your mortgage and this is a
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one-time
[380]
upfront fee that actually lowers your
[382]
interest rate on your mortgage
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and points may cost you a few hundred
[385]
dollars only up to a few thousand
[386]
dollars
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and they also just get added to the
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principal balance that you owe
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the bank now despite the fact that
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buying points will lower your monthly
[394]
mortgage payment slightly
[396]
for the vast majority of the time they
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are not worth it and you're going to end
[400]
up spending
[401]
more money in the long run by buying
[403]
points on your mortgage
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you see the lender is going to highly
[406]
encourage you to buy points
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on your loan when you refinance because
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they make more money
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by selling you points on your mortgage
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and the reason why points are not worth
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it for the vast majority of people is
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because
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most people either sell their house or
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refinance their mortgage
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long before they actually see any
[423]
savings from buying points to determine
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if points are actually worth it for you
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you need to do what's known as a break
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even analysis
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so as an example let's say your lender
[432]
says for four thousand dollars up front
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you can buy
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one point and that's going to reduce
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your monthly mortgage payment by 57
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a month and so that means it would take
[440]
you 70 mortgage payments or almost six
[443]
years
[444]
to recoup your initial investment of
[445]
four thousand dollars
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and before you actually start saving any
[449]
real money so if you know ahead of time
[451]
that you are going to live in that home
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for longer than six years let's say that
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you're retiring
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and you don't plan on refinancing your
[458]
mortgage within those six years
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then yes this actually could save you
[462]
money in the long run but if you're like
[464]
most people you don't know if you are
[465]
going to be living in the same house six
[467]
years from now or maybe you plan on
[468]
having a larger family in the future
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then buying points most likely is not
[473]
worth it because you're either gonna
[474]
sell your home
[475]
or refinance that mortgage long before
[478]
you see any savings from buying the
[479]
points and unfortunately there are a lot
[481]
of people out there that
[482]
refinance their mortgages every few
[484]
years or do a cash out refinance
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and they do pay for the points every
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time they get that lower interest rate
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and they never make any real progress on
[494]
paying down their debt to the bank
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in fact there's a lot of people that all
[497]
are doing is increasing their debt to
[499]
the bank
[500]
every time that they refinance so the
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first example i gave you i showed you
[503]
how
[503]
refinancing your mortgage at the same
[506]
interest rate in order to lower your
[507]
monthly mortgage payment
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really doesn't make any sense and i also
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showed you how paying for points when
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you refinance
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for most people also doesn't make any
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sense
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but we are seeing historically low
[518]
interest rates right now
[520]
so you're probably asking yourself what
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about refinancing to lock in a
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much lower interest rate and yes
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sometimes it does make sense to
[527]
refinance a lock and a lower interest
[529]
rate
[529]
if you're gonna live in the home long
[531]
enough to take advantage of that so to
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determine if it's worth it for you to
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refinance a lock in a lower interest
[536]
rate
[536]
we're really going to need three
[537]
different numbers for you to do your
[539]
break even analysis
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and the first number is going to be what
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your current balance is on your mortgage
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so you can log into your bank account or
[545]
look at your most recent statement to
[547]
figure out what this
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is in our example when we were 10 years
[550]
into a 30-year mortgage
[551]
our current balance was 235 000
[554]
so the second number you need to figure
[555]
out is how much interest you're paying
[557]
on your current balance
[558]
a year right now and then determine how
[561]
much
[562]
interest you're going to pay a year with
[563]
your new interest rate and the
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difference between these two numbers is
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going to be about how much you save
[569]
every single year in interest so with
[570]
our example we owe 235 000
[573]
if we multiply that by four percent to
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get how much we pay in interest
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every year we see that we're paying
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about nine thousand four hundred and
[581]
twenty eight dollars a year
[583]
in interest on that balance so let's say
[585]
you refinance and you got a half a
[586]
percent lower so you got three and a
[588]
half percent interest rate instead of
[589]
four percent
[590]
you'd only be paying eight thousand two
[592]
hundred and forty nine dollars a year in
[594]
interest
[594]
and the difference between those two
[596]
numbers is one thousand one hundred and
[597]
seventy nine dollars a year
[599]
that you're gonna save by refinancing
[602]
into that lower
[603]
interest rate so the third number that
[604]
you need to know is what are the closing
[606]
costs to refinance your mortgage
[608]
so how much is it going to cost you to
[610]
get this lower interest rate
[611]
and you can get a free estimate for
[613]
refinancing your home pretty much from
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any lender out there
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now when you get your estimate make sure
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that they're not charging you
[619]
any points a lot of lenders will
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automatically charge you points and not
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fully explain how they work
[625]
and feel free to shop around maybe get
[627]
multiple estimates from a few different
[628]
lenders but let's use the national
[630]
average of five thousand seven hundred
[632]
and seventy nine dollars
[633]
in closing costs to refinance your
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mortgage so now you need to determine
[636]
how long you need to live in that home
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before the
[639]
savings that you get every year is
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greater than that upfront cost to
[643]
refinance your mortgage so we divide
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that five thousand seven hundred seventy
[647]
nine dollars in closing costs
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by your annual savings of one thousand
[651]
one hundred and seventy nine dollars and
[653]
we get four point
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nine so in this scenario it would take
[656]
you about five years to
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save more money than you're initially
[660]
spending
[660]
to refinance your mortgage but let's say
[662]
instead of lowering your interest rate
[663]
only half a percent you actually got a
[665]
full percentage lower
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and you went from a four percent
[668]
mortgage down to a three percent
[669]
mortgage so at three percent interest
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rate with this scenario you'd pay seven
[673]
thousand
[673]
seventy one dollars a year in interest
[675]
and if you compare that to how much
[677]
you're paying a year at four percent
[678]
interest
[679]
you're saving two thousand three hundred
[681]
and fifty seven dollars a year in
[682]
interest and that's actually pretty good
[684]
so once again if we divide your closing
[686]
costs of
[687]
thousand seven hundred seventy nine
[688]
dollars by your annual savings of two
[690]
thousand three hundred fifty seven
[692]
dollars
[692]
we get two point five so two and a half
[695]
years
[696]
before your savings is greater than how
[698]
much it costs you to refinance your
[700]
mortgage so if you plan on living in
[702]
that home for
[703]
longer than two and a half years and
[704]
you're not expecting to refinance again
[706]
within that time period
[708]
then it would make sense for you to
[709]
refinance your mortgage at that lower
[712]
interest rate now if you go back to the
[713]
original example i talked about how one
[715]
of the major
[716]
pitfalls of refinancing into a new
[718]
30-year mortgage
[719]
is that you don't really make much
[721]
progress on paying down your debt so if
[723]
you do refinance your mortgage to lock
[725]
in a lower interest rate this is
[726]
something that you want to take into
[728]
consideration
[728]
and you may not want to go for another
[730]
30-year mortgage if you were 10 years
[732]
into a 30-year mortgage you may just
[734]
want to refinance into a new
[736]
20-year mortgage and that way the amount
[738]
of money that's going towards your
[739]
principal is gonna stay about the same
[741]
every month
[742]
and if you actually wanted to pay your
[743]
principal off early
[745]
and put that savings that you're making
[747]
every single month towards the principal
[749]
you could instead refinance into a
[751]
15-year mortgage or even a 10-year
[752]
mortgage and banks actually offer you
[754]
lower interest rates for these lower
[756]
time periods because there's less
[758]
risk to the bank so now that you
[759]
understand a little bit more about how
[760]
your mortgage payment works
[762]
if you want to learn 10 hacks to pay
[764]
your mortgage off early
[765]
check out this video i did right here
[767]
breaking those down for you
[768]
don't forget to subscribe for more real
[770]
estate and financial advice and hit that
[772]
little bell icon to get notified every
[773]
time i upload a new video
[775]
thanks so much for watching and i'll see
[776]
you over in the next video
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