When it the right time to refinance my home?

Ralph Estep Jr.:
00:00

Have you ever felt like your mortgage payment is holding you back from, well, actually living? Like maybe you could be using that money for something else. Maybe you're just tired of those high interest rates eating away at your hard-earned money. Well today, we're tackling the big "R." That's right. Refinancing. We'll explore when it makes sense, the different types of refinancing, the cost involved, and how your faith ties into all of this. This is an episode you don't want to miss.

Ralph Estep Jr.:
00:30

Before we get started, I want to share a message I received from a listener. Her name is Connie. She writes this. "Dear Ralph, I'm so glad I found your podcast. I've been feeling overwhelmed by my finances, but your advice always gives me hope. My question's about refinancing. My husband and I bought our house a year ago, and interest rates have dropped since then. Everyone keeps telling us we should refinance, but it seems so complicated after just going through the mortgage process. Is it really worth it? And how do we even know where to start?"

Ralph Estep Jr.:
01:04

Well, that's a great question, Connie. Refinancing can feel like navigating a financial maze. I've been through it. But don't worry. We're going to break it all down for you today. Welcome back everyone, and a special welcome to our new listeners joining us today. I'm so glad you're here. Remember, this is the Ask Ralph show where we tackle your financial questions through the lens of our Christian faith.

Ralph Estep Jr.:
01:28

Today, let's turn to Proverbs 24:3 and 4, which says this. "By wisdom a house is built, and by understanding it is established; by knowledge the rooms are filled with all precious and pleasant riches." That's a great verse to talk about what we're talking about today. The verse reminds us that true wealth isn't just about money. It's about making wise decisions based on knowledge and more importantly, understanding. And that's exactly what we're going to do today as we explore the ins and the outs of refinancing.

Ralph Estep Jr.:
02:06

Now, let's dive into Connie's question about refinancing. First things first, what exactly is refinancing? In simple terms, it's swapping out your existing mortgage for a new one, often with better terms. Think of it like trading in an old car for a newer model with better gas mileage. Now you might be thinking, "Ralph, that sounds great. Lower payments, maybe even some extra cash. Where do I sign?" And while refinancing can offer fantastic benefits, it's really not a one size fits all solution. Just like any other major financial decision, it requires careful consideration and thoughtful prayer.

Ralph Estep Jr.:
02:45

So when is the right time to consider refinancing? Well, that's, we're going to talk about today. So here's a few key scenarios. The first is this. Lower interest rates. This is often the biggest motivator. If interest rates have dropped significantly since you took out your original mortgage, refinancing could save you thousands of dollars over the life of the loan. Now you might be saying, Ralph, interest rates now are actually higher than what I'm paying now. That's exactly why choosing to do a refinance may not be the best option and it's actually the reason why so many people are sitting on their homes and not buying new homes because they have such low interest rates before this crazy inflation took off.

Ralph Estep Jr.:
03:27

For most people, refinancing right now is not the right answer. If the rate is not the issue, perhaps you want shorter loan terms. Maybe you want to pay off your mortgage faster. Refinancing to a shorter term, like going from a 30 year to a 15-year mortgage can help you become debt free sooner, even if it means slightly higher monthly payments in the short term.

Ralph Estep Jr.:
03:50

So I'll tell you a story here. About 15 years ago, I met with some clients who were in a 30-year loan. They asked me what financial advice I had about that. And I told him boldly, "Hey, why don't you think about refinancing to a 10-year loan?" When we ran the numbers, we were able to find that by paying just a few hundred dollars more a month, they could reduce their loan from 30 years to 10 years. Guess what? They did it. A few years ago, they paid off their home and save thousands in interest and thank me every time I see them since they now are nearing retirement and have no mortgage.

Ralph Estep Jr.:
04:26

Another reason, maybe you're looking for a cash out refinance. This option allows you to tap into your home equity and receive a lump sum of cash. This can be helpful for home renovations, maybe consolidating high-interest debt or funding major expenses. However, and this is important: It's crucial to have a solid plan for using the cash wisely and responsibly. I've seen way too many cases where these cash outs resulted in a client getting into a financial crisis that frankly could have been prevented if they had a better plan for the money.

Ralph Estep Jr.:
05:02

So the moral story is find someone to assist you in developing a plan for the money before you pull the trigger on that cash out refi. Well now let's talk about the different types of refinancing. There are generally two types. Rate and term refinances is the first one. This most common type. You're simply getting a new loan with a lower interest rate and, or a different loan term. Maybe you're doing it to reduce the interest rate, again, that may not be possible in the current state of inflation or more importantly, maybe you're working to reduce that loan term. Like my clients went from 30 years down the 10.

Ralph Estep Jr.:
05:37

And as we discussed, cash out refinance. This allows you to access your home equity. Just remember this. This option is going to increase your loan amount and can put your home at risk if you're not careful. Imagine losing your home because of a bad financial decision. So as my grandfather always said, measure twice and cut once.

Ralph Estep Jr.:
05:59

And I know what you're thinking. This all sounds great Ralph, but what about the costs? And that is a crucial question. Just like buying a home, refinancing comes with closing costs. That could include things like appraisal fees, origination fees and likely title insurance. These costs can range from 2% to 5% of your loan amount, so it is absolutely essential to factor them into your calculations.

Ralph Estep Jr.:
06:28

So you're coming back to the question, "Ralph, how do I determine if refinancing is right for me?" I'm going to encourage you to consider these factors. How long do you plan to stay in your home? If you're planning to move soon, the closing cost might outweigh the potential savings. This is something, again, you want to discuss with a financial professional.

Ralph Estep Jr.:
06:48

How much will you save each month? That's a main consideration. You need to calculate your break-even point. That's the time it takes for your monthly savings to offset the closing costs. And that's really going to depend on your particular loan. And finally, what are your financial goals? Are you trying to reduce your monthly expenses? Are you trying to pay off your mortgage faster? Or are you trying to access your home equity for other purposes?

Ralph Estep Jr.:
07:16

Now before you rush out and refinance, it's essential to understand the qualifications. Lenders will consider your credit score. They're going to consider your debt-to-income ratio and your home's loan-to-value. You might hear this called LTV. In layman terms, that's the fair market value of your home versus the potential loan amount.

Ralph Estep Jr.:
07:35

When I was a credit union executive in my past life, it seems like such a long time ago, we generally would do what's called a cash out refi up to 80% of the home's value. So you have to take that into consideration at the front end. A good credit score and a low debt to income ratio usually qualify you for the best interest rates.

Ralph Estep Jr.:
07:55

And remember, just like when you bought your home, your lender is going to require an appraisal to determine your home's current market value. And in this complex economy, I've seen real volatility in the appraisal market, so this is yet another important consideration. It might make sense to even consider consulting with a realtor and get what's called a market analysis of your property even before considering doing a refi, just to get an idea about that home's value.

Ralph Estep Jr.:
08:22

So, you might be asking Ralph, how does our faith tie in all this? Well, the Bible teaches us to be good stewards, what God has given us. And that includes our finances. As Proverbs 27:23-24 says, "Know well the condition of your flocks, and give attention to your herds, for riches do not last forever; and does a crown endure to all generations?"

Ralph Estep Jr.:
08:46

Again, this verse reminds us that our financial resources are not unlimited, and we need to manage them wisely. Before making any significant financial decision like refinancing, it's essential to pray about it. It's essential to seek wise counsel. And it's essential to ensure our motivations align with our faith values. So to recap, refinancing can be a powerful tool to improve your financial situation, but it's not a decision to take lightly. You got to weigh the pros and cons carefully. Consider your financial goals and remember to seek God's guidance throughout the process.

Ralph Estep Jr.:
09:23

And don't forget, if you have a question about refinancing or any other financial topic, send it my way. You can reach me through the Ask Ralph Show website. That's at askralphpodcast.com. And while you're there, be sure to sign up for our email list. As a thank you, you'll receive a free copy of my book. This is it right here. Mastering your finances. This sells for $10 on Amazon. That's right. It's yours, absolutely free just for joining our email list.

Ralph Estep Jr.:
09:48

Well, that's all the time we have for today. But before I go, I want to leave you with this thought. Your financial journey is not just about numbers. It's about aligning your money with your values and using your resources to make a difference in the world.

Ralph Estep Jr.:
10:03

Join me again next time on the Ask Ralph Show as we tackle another important financial question from a Christian perspective. Tomorrow, we'll be discussing how to evaluate your life insurance needs. We all need life insurance or at least most of us do. So that's an episode you don't want to miss. So as I always say, until then, stay financially savvy and God bless you.