Two Years Down, Many More to Go!

Credit: Stuart Miles

It’s hard to believe almost two years have passed since we dove into the personal finance world together with a crazy story about considering opportunity costs in terms of junior bacon cheeseburgers. I guess time flies when you're having fun. I have enjoyed 2MuchCents, and I hope you have as well. 2MuchCents.com will close out 2013 with almost 14,000 views spread over 14 countries! For that, I thank you.

A lot of bloggers start strong, but run out of ideas. I admit I have some spells where I battle writer’s cramp a bit more than I would like, but I’m definitely not afraid of topics drying up. Between your questions, your friends’ questions, your family members’ questions, new things I learn and experience, and never-ending changes and developments in this crazy world we live in, I think I could probably write forever. I already have plans in 2014 to post about why you need to save now as opposed to later, how you can keep as much of your family’s money in your family as possible, and why I think you should be a “contrary” investor. I also want to take a close look at index funds, offer some tips on buying a car, do another lighting round (where all I do is answer your questions), and write a short series on how I would advise someone to position themselves so they can retire early. (You’re not interested in retiring early are you?) Despite my plans and future posts already in progress, please know I get the most joy out of directly helping people like you by answering your questions; whether it gives me an opportunity to do a blog about your topic or not.

In case you missed any posts, the five most popular posts of the year were:

1. This Diamond Ring
2. It Happens
3. Last Call
4. The Homemaker Retirement Plan
5. All That Glitters Is Not Gold

I think one more blog post is worth mentioning, My Uncle’s Living Expenses, because I got a lot of in-person comments on that one. After mentioning it again, maybe I’ll get more!

Let me once again thank Mr. Andrew Davis for his tireless edits and content advice. I also need to thank my special lady, Mrs. Lindley Presley, for her continued encouragement, social media guidance, and grammatical expertise. I could not produce 2MuchCents without those two individuals.

Here’s to a healthy, happy, and financially successful 2014!

-Tom

Last Call

Credit: Stuart Miles

Three years ago, my wife and I bought a townhome. And, by bought, I mean took out a mortgage for a townhome. At the time, our parents and friends were high-fiving us for the interest rate we got: 4.75%. It was amazing. I mean, there was no way interest rates could get any lower, could they?

Fast-forward to the present: interest rates have gotten lower. To be honest with you, my 4.75% was actually beginning to smell a little as I have casually been comparing it to the mortgage rates that many of my clients  have been sharing with me over the past few months. The rule of thumb is that you are usually wasting your time refinancing if the refinanced interest rate is not at least 1% less than your current rate, but just as I could have never envisioned in 2010, many current interest rates have fallen more than 1% when compared to my 4.75%. Thus, my wife and I are right in the middle of doing what I have advised many clients to consider doing over the past few years: refinancing.

So, why all the fuss this week? Why not another post on what you should do after you have a kid, why you should check your engine now, or how to make sure you can survive mayhem? Because I personally think interest rates have, to quote the musical Oklahoma!, “gone (down) about as far as they can go.” Think about your checking account interest rate – it’s pretty close to 0%. Chances are that, unless you have refinanced within the last three years, current refinancing interest rates are probably worth your looking into. And you should look into them soon because the housing market is beginning to pick up a little steam, and the Federal Reserve has recently started signaling that the Fed could be thinking about scaling back their bond-buying program (many economists believe the Federal Reserve’s bond-buying program has been artificially keeping interest rates low).

If you heed my advice and look into refinancing, let me share a few tips that I think you will find helpful:

• Reach out to multiple lenders, including your current mortgage holder. The rates and fees will likely be very similar, but it’s worth talking to several lenders before you proceed as a sanity check just to make sure the particular lender you are considering is shooting straight with you. A crafty representative or two may try to pressure you by saying that “rates could change by the end of the day,” but don’t let that bother you; being thorough and comfortable is likely more important than one day’s worth of difference in rates and fees. Also, rates and fees aren’t necessarily going to get worse in 24 hours; they could improve, but not all loan representatives will mention that...
• Your current lender could offer a smoother transition than someone new, but if there is a relative tie in rates and fees, I would lean towards whoever seems the most knowledgeable and responsive, and offers the best customer service.
• Try to have some idea of what you are looking for before you call a lender. Are you looking to refinance into a 30-year mortgage? Are you looking to go from a 30-year mortgage to a 15-year mortgage? Are you planning on owning the property for the life of the loan? The more you can tell the potential lender upfront, the more specific and helpful information they will be able to quickly provide. Don’t worry though, because after you practice on potential lender #1, you will be much more comfortable when you reach out to potential lender #2!
• If it were me, I’d ask lenders for three scenarios: their lowest interest rate possible (will likely require additional money from you at closing, but gives you the best interest rate), a no-closing cost scenario (don’t let the name fool you - there will be fees, but you will likely pay less at closing and your interest rate will only be a little higher than the lowest rate), and a lowest total dollar amount scenario (kind of a happy medium between the lowest interest rate and no-closing cost scenarios where you pay a little at closing and get an interest rate between the lowest rate and the no-closing cost rate). This will likely give you three, pretty-solid options to consider as you decide what is best for your particular financial situation.
• Finally, know what you’re getting into. Refinancing can be a nuisance to the posterior, if you know what I mean, but going through the process can offer some real financial benefits. If you go forward with refinancing, you will have to provide tons of documentation, answer lots of seemingly ridiculous questions, and sign numerous forms relatively quickly. Don’t get overwhelmed, though. Take a deep breath, respond as quickly as you can, and by all means, carefully read what you are signing.

Sadly, Donna Summer’s Last Dance came to my mind as I started writing this post because I was thinking about the possibility that right now could be the last chance for many of us mortgage holders to benefit from these historically low interest rates. Have no fear though, since hearing from my soon-to-be new lender that my wife and I have been approved for a new mortgage (that’s even more favorable than the one we got in 2010), I’ve found myself humming Semisonic’s Closing Time.

What? Don’t judge. If you refinance, you might find yourself singing, too!

-Tom

To Refinance or Not to Refinance, That is the Question

Credit: jscreationzs

One of the most common questions I get from clients is whether or not they should refinance an outstanding mortgage. As is the case with most financial advice, it depends. It depends on how much lower the potential rate is than the current rate, it depends on what type of mortgages or lending instruments we are talking about, and it depends on fees and closing costs. Let me quickly walk you through the decision-making process as I would a client.

The first items I would want to know from a client are their current interest rate and the rate of the potential new mortgage. If the difference between the two interest rates is not more than one percent, the conversation will usually stop there. This is because any small monthly payment benefit you might receive from that refinance flyer you got in the mail will most always be immediately negated by administrative fees and closing costs that you must pay. In addition, anyone who has been through a closing knows that the whole process is usually a stressful hassle with a cost in sweat and tears in addition to dollars.

The second items I would want to know from a client are what type of mortgage they are currently in and what type of mortgage they would be potentially refinancing into. Basically I would be checking to make sure the client is not thinking about refinancing into another 30-year mortgage when they are already 10 or 20 years into their current 30-year mortgage. The lower interest rate of the refinanced mortgage would not matter because the overall costs would be increasing due to the longer period of interest rate compounding. In English, 3.5% over 30 years is not necessarily better than 4% over 15 years. I would then take the opportunity to talk to the client about how comfortable they are with increasing their monthly payments. Refinancing into a shorter term mortgage is sometimes more beneficial than even the lower interest rate. This is because a 15-year mortgage roughly requires a monthly payment of only 25% more than a 30-year mortgage and allows you to build up equity in your home twice as fast!

Based on the client’s responses, I would then raise a few other questions such as:

- How is your credit now since the last time you got a mortgage? If it has gotten worse, refinancing probably does not make sense. You’re not going to get as favorable terms as you did the first time!

- How much equity do you have in your home? If you have to borrow more than 80% of the value of your home, you’re not going to be getting the best rates. You should probably wait until you have finally reached that 20% down threshold, and then consider refinancing.

- What are your closing costs? I’ve mentioned this already, but you really do need the specifics before you refinance because many items, such as recording fees, title fees, appraisal fees, attorney fees, points, and transfer taxes, could come into play. These one-time payments alone can make your decision for you about whether or not it is a good idea to refinance.

With interest rates at historical lows over recent years, refinancing has been very popular. Refinancing has been a very good financial strategy and has helped many of my clients, but you can actually make things worse for yourself and cost yourself more money in the long run if you do not consider things carefully.

-Tom