167R | Should I Refinance My Mortgage?

167R | Should I Refinance My Mortgage?

Dropping mortgage rates prompt a conversation that explores the pros and cons of refinancing your mortgage at a lower rate. Plus, Steve Chen from NewRetirement joins the show to share the comprehensive retirement planning tools that his company has to offer.

  • Jonathan was able to lower the interest rate attached to his mortgage by a full percentage point. By locking in that lower rate, he will save hundreds of dollars in interest payments each month.
  • Refinancing your mortgage could be a good decision. However, you need to take a closer look at the fees from different offers that you consider. Find out when the cost of the fees would make the switch worth the effort of refinancing. If you plan to move before you recoup the costs of the fees, then refinancing may not be a good option.
  • A few big fees to pay close attention to include origination fees, appraisal fees, and percentage points. Weigh the cost of the fees against your potential savings before making a final decision.
  • Steve Chen, the founder of NewRetirement, gives a great overview of the tools available on his site. The goal of the software is to help you determine the outcome of seemingly small decisions along the way. For example, you can use the tools to find out whether it makes more sense to buy or rent and how Social Security will affect your retirement. The software offers a comprehensive way to map out your retirement spending plans.

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Table Of Contents

Employees Making More Contributions To Their 401(k)

Jonathan: On today’s episode, we’re going to discuss refinancing your home. What should you consider? Should you do it and what to watch for, and then tools and calculators for the Financial Independence community.

Welcome to ChooseFI.

All right, everyone. Super excited to dive into this week’s episode, and help me with this. I have my cohost, Brad, here with me today, how are you doing buddy?

Brad: Hey, Jonathan. I am doing quite well.

Yeah, actually, this morning I was reading my local newspaper and I saw an article in the business section that made me very, very happy. It said the title is 401(k)s hit records as workers sock away more and stocks jump.

The upshot of this article was that the 401(k) balances, according to Fidelity, have hit all-time record average highs, and that is altogether not surprising. The S&P 500 I think was up 31% in 2019, so there’s that. But the part that made me extremely happy was that Fidelity said the average worker set aside 8.9% of their pay into 401(k)s in the fourth quarter. That combined with employer matches, the average total savings rate was 13.5%

Jonathan: Wow.

Brad: Right, Jonathan?

Jonathan: What’s that a subset of? Who is that measuring?

Brad: Yeah, that’s measuring the average workers who are putting into 401(k)s in the fourth quarter of 2019. So, 13.5% I guess is what Fidelity is seeing across the, probably hundreds of thousands or millions of workers that are in Fidelity 401(k)s.

That was astonishing to me. The cool thing they’re saying that’s factoring into this is that employers, at a record level, are auto enrolling new workers into their company’s 401(k) plan. So, this is behavioral. If they’re auto enrolled, most people aren’t going to go out of their way to say, “Oh no, no, I don’t want to invest for my retirement. I don’t want to get the free money that is the 401(k) match. I’m just going to stay in it.”

So, 35% now being auto-enrolled, which is the highest ever. So, Jonathan, as a member of the FI community, this is wonderful.

Brad: 8.9% is what people are putting into their 401(k)s. Now granted, this is a subset and 35% are being auto-enrolled. These are crazy numbers compared to where this has been not all that far in the distant past.

Jonathan: I love it, man. We get to talk about some current news here. I wonder how many people in our audience still get the paper, the actual paper on their front porch like …

Brad: Oh, well, that’s funny. I didn’t realize just how outdated I am with this. When we went to Camp FI last year, I think there were 60 of us in the room and we have these little icebreakers the first night. One of the questions was, who in the room essentially gets a daily newspaper? If you do, you have to get up and run to an emtpy seat. It was like this silly kind of icebreaker. Jonathan, there was me and one other person out of 60.

Jonathan: I’m glad you went alone.

Brad: I had no idea. We get two newspapers, we get the Washington Post and the Richmond Times. So yeah. Big fan of the newspaper here.

Jonathan: Awesome. No, that’s great. Talking about current events, New York Times just released an article saying how millennials could make the feds job harder. We don’t usually spend a whole lot of time talking about current articles, but this one was deliberately, it was actually talking about the Financial Independence movement and actually referenced Scott and Taylor, referenced the documentary and basically said millennials are going to be the end of all of us because everything they do is extreme. They either love their avocado toast. That’s a different article. They didn’t actually mention that, but I’ve certainly seeing an avocado toast article about millennials in the past.

But in this case, it’s saying millennials are saving too much with the goal of early retirement. If that happens, it’s going to break the Federal Reserve’s ability to manage inflation, which I don’t know. You just can’t win. Millennials are going to be the end of the world regardless, one way or the other. They either save too much or they spend too much, and someone will find an excuse to write about it either way.

But in the meantime, I would say that let’s keep trying to break the system by encouraging people to save as much as possible for as long as possible and the world can figure it out in post.

Take Action On 1% Changes

Brad: Yeah, agreed. Kudos to millennials out there if they are breaking the economy for saving too much. That is absolutely phenomenal.

I would say, I mentioned behavioral science a couple of minutes ago. A lot of Financial Independence, a lot of saving money, a lot of thinking long-term is truly psychological and behavioral. If you’re out there and saying, “Oh, I’m only saving 4% of my 401(k),” or even if you’re saving 20% and you’re still not at the max, what I would say is take action this week. Go to your HR department and just add 1%.

You’re never going to feel the difference, but if you do that every single year to the point where you can max out your 401(k), it is going to make an astronomical amount of difference in your 401(k) balance when you’re ready to retire, whenever that is. But you have to take action. You cannot just simply listen to this podcast or read articles or whatever it may be. You’ve got to get up and take action. That is so simple to make a 1% difference. Right, Jonathan?

Jonathan: Yeah. We haven’t gotten super soap boxy lately and I feel like we could take a stand here. We could really lean into this moment like someone made a choice-

Brad: I’m very frightened right now.

Jonathan: It’ll be fine. Someone made the choice to listen to us today, and maybe they’ve been giving us a chance. They’ve been listening to episodes over the past month or so.

First of all, wouldn’t it be amazing that if every single person, literally every single person that had access to a 401(k) that listened to our show participated in that 401(k)? But we also have to acknowledge at the same point that is not the case. Somebody hasn’t done it yet. Right now, if you’re listening to this, you know if I’m talking to you. What if this week, that person, those individuals that say, “Ah, crap called me out,” went to the HR department and got enrolled in their 401(K) program, and then to your point, 1% better. Start at whatever it takes to get the match if your company offers it, if they don’t offer match, don’t let that stop you.

Then, sometimes with the HR department, they have an option, you just tick one box and it basically says, without me making any additional decisions, would you like for us to increase your contribution by 1% each year?” To your point, the auto-enroll, anything you can autopilot, any positive decision that you can remove from something that you have to logically do each and every year will work to your benefit.

I think if you’re going to get to the gold standard, the Brad Barrett 10 minutes a month on your personal finance guaranteed path to FI. you have to figure out a way to autopilot all the decisions that are taking up all of your time now to almost force this eventual outcome.

I think if you’re going to get to the gold standard, the Brad Barrett 10 minutes a month on your personal finance guaranteed path to FI. you have to figure out a way to autopilot all the decisions that are taking up all of your time now to almost force this eventual outcome. I don’t know, soapbox’s over. That was pretty easy, right?

Brad: No, I love it. I love it. Yeah, you really do need to take your brain out of this. Our brains sabotage us with short term thinking and emotional thinking. Frankly, all of us are susceptible to this, every single one of us.

So, take your brain out of it as much as possible, put it on autopilot. There’s no question about it. Jonathan, just real quick, you mentioned the 401(k) match. Some people also who are not enrolled in 401(k) might not even know what that is.

It is essentially free money, okay? This is part of your salary, whether you realize it or not, your employer, when you put in a certain amount into your 401(k), and now each employer has different rules with how their match works, but I’ll just say hypothetically, if you put in 5%, your employer might match 50 cents of every dollar, okay?

So, you’re putting in 5% of your salary, your gross salary, and your employer is then putting in half of that as free money. So, they are putting in 2.5% of your salary into your 401(k). Now, if you make, let’s just say $100,000, 2.5% is $2,500 that your employer expects to give you essentially for free in salary. If you’re not contributing to your 401(k), you’re basically saying, “No, I don’t really want that $2,500, I don’t want it.” That is crazy. This is the easiest way to get a hundred percent return on your money instantly. They are matching this and giving you free money.

Jonathan: Yeah. You don’t even have to make a $100K to get that benefit. Many people in our community, let’s say you’re making $50,000 a year and they offer you again, a 5% match. This is very common. My wife was a teacher making less than 50,000 for a period of time. They offered a 7% match, right? But $50,000 a year with a 5% match, 2,500 bucks.

So, to not do that, to not take action to stay course, to your point, Brad, you’re saying, “I don’t need that 2,500. My future self doesn’t care. I can afford not to have that. No big deal.” What? That’s crazy. Let’s do this together. 1% better though. There are so many different ways that you can get 1% better. Speaking of 1% better, I saw an article online this past week that caused me to take massive action and it was basically saying, hey, interest rates on home mortgages are going down this week upon fears of maybe just whatever’s happened in the economy, if interest rates are taking a nosedive.

So, I was like well, I purchased a home earlier this year. I should check it out. I gave a refinancing, a home mortgage refinancing company a call and was able to see that right now at this point in time, that it was all the way down near like 3.25%, 3.25%. My current mortgage was that like 4.35, something like that.

It’s well over one percentage that I was saving my mortgage. I quickly did the math and realize we’re talking about, that’s well over $300 a month that I could save if I made this adjustment. So, what did I do next? I was like, I got to tell everybody about this. So, I immediately called you, and sure enough, you are sitting on a higher rate and you got yours bumped down as well in the process.

Brad: Yeah. Like we say on the podcast, it is all about taking action. I got to be honest, I was not looking forward to this at all, because I’m self-employed and I don’t have a typical W-2 job. I was worried about how laborious this process would be, but it was so stupid. That is just such a limiting belief, especially when you’re talking, for me, it was amounting to almost $300 a month in interest. I would save every single month for the next 30 years just to invest, even if it was a couple hours, Jonathan, of my time to collect paperwork and all this stuff, that’s obviously worth it, right? I was being so stupid.

Again, we talk about how your brain can sabotage you. This is my own brain. I talk about this twice a week on a podcast to many, many hundreds of thousands of people. You would think I would have my stuff straight, but even I don’t. Thank you for the push in the right direction.

I actually got in a little bit late on this. I’m getting a one and a quarter percent savings. So, my old mortgage rate was 4.625% and I didn’t get the three and a quarter. I got 3.375 which is still an immense, immense drop. Yeah, I am thrilled with this. It’s a done deal and again, it’s about taking action.

For me, I didn’t even tell you this. One of the things that I like to review every single year is my insurance policies. Actually, this year it was one of those instances where I didn’t find cheaper prices, but I have in my Todoist. So, every single year I have a recurring task that basically on February 15th I review my insurance policies and I get some online quotes. I went through all of my insurance policies.

It’s just something that I used to let slide for so many years. I would just let it slide. That’s just not good enough when it just takes a couple minutes. I would implore everybody out there. Think about these examples. The mortgage is the most obvious one. We’re going to talk about this in a minute here. I think go through exactly what to look for, but think about other aspects of your life that you’re just not taking action on, and how do you make your life a little bit better?

Again, for me, I didn’t save any money on my insurance this year, but I can guarantee you if I didn’t do that for three or four or five years, I would be wasting money. It’s a huge benefit to me to invest even that 30 minutes. But I’m doing it every single year. Again, just think about aspects in your life where you can save money if you just take action.

Should You Refinance Your Mortgage?

Jonathan: Yeah. Let’s spend a little bit more time talking about refinancing and how to calculate that. Just very simply. If you have a $300,000 home and you have a 4% interest rate, 5% interest rate, pick any number. But if you’re able to chop off 1% off the interest rate that you’re paying, so go from four to three or five to four, whatever. 1% of that mortgage, so $300,000 times 1%, that is $3,000 a year. $3,000 a year that you could potentially save.

Yeah, so let’s go ahead and go a little bit deeper and talk about what people should be considering if they are interested in refinancing their mortgage and doing like a break-even analysis, that sort of thing. I think at face level, if you can take one percentage point off the interest rate that you’re paying on your home, that is pretty freaking compelling.

If we’re going to use a practical example, just so someone without doing a whole lot of math can appreciate what it would mean. If you got a $300,000 mortgage and you were paying a 4.5% interest rate on that mortgage and you were to, as a result of this conversation, go out and find that you could get a competitive 3.5% interest rate, instead, and this is in the absence of all the other stuff that we’ll talk about in a second here. But just on that percentage savings alone, that 1% savings rate, you would go from a monthly payment of $1,520 down to a monthly payment of $1,347, saving you right out the gate $173 a month on your payment. That’s about $2,000 of savings a year. Talk about 1% better.

Brad: Yeah, Jonathan, and actually I think you might even be underselling it there, which is the coolest aspect of this. You’re looking at the change in the payment, but what I look at maybe with my crazy accountants’ brain is the interest expense. Because when you’re talking about a mortgage payment, really you have principal and interest in there. Those are the two components. Now, obviously there’s also escrow, but that’s not what we’re talking about. We’re talking about the main components of a mortgage payment. It’s principle plus interest.

When you think about this, this is a 1% drop in the interest rate, and on a $300,000 mortgage, you would expect this to be about $3,000 that first year.

Now, it’s an amortizing mortgage, so the balance is dropping a little bit. So, it changes ever so slightly for the sticklers out there. But in real terms, over the first year in this 1% difference in interest rate, over that $300,000 mortgage, you would save $3,000 in interest expense. That is the savings, even though really what people generally care about is how much is going out of pocket. How much do I have to pay to cashflow this? But the cool thing about the Financial Independence community is we can think a little bit deeper. When you have assets and when you are in a strong financial position, you can actually look at what is truly happening.

What’s neat about this is your principal payment would actually be going up over the higher interest rate version when you cut this by 1% interest. So, while your payment doesn’t go down by the full $250 a month, it goes down by 170 and change. Some of that portion is going additionally to principle. So, you’re paying down your mortgage quicker. There’s always a little bit of nuance which is fun, but that’s what’s neat about being in this community is we get to explore this stuff.

Jonathan: See, what I love about this show Brad is I just speak to the people. Like, “Well, okay, fine, what’s my payment?” But there are those in the community that are like, “Yeah, but what’s the nuance there? How does this really …” and you’re right, I like the depth there.

But practically speaking, we have on our website an amortization calculator, apps.choosefi.com. There’s a copy of transcripts on there. There’s some calculators on there that you can use. Definitely check that out if you’re trying to do this analysis.

I thought what we could do though is like, it’s not just what is the difference in interest rate, it’s what are the fees, right? The fees matter. What are the fees that are associated with you effectively getting a new mortgage?

It’s not just, “Oh, by the way, let me drop your rate.” No, you’re actually, when you refinance, you’re basically rebuying your house. At baseline, there’s going to be some fees involved, but they can verge on egregious depending on the company that you end up using. So, it’s important to have an understanding of what’s out there that way you know when you get a competitive offer.

Things To Consider Before Refinancing Your Mortgage

Mortgage Fees

Brad: Yeah. Jonathan, there’s certainly are a lot of potential fees and all different lenders charge you different items, which is really interesting. So, just having a sense of the general categories I think is really important.

Jonathan: Yeah, and recognizing they don’t all charge you the same ones. Some are going to be there no matter what.

For instance, one of the ones that comes to mind is mortgage and title insurance fees. Your state probably has some fees that are associated with selling a property in that state. Those aren’t going away. You’re going to pay for it. Title insurance, it’s not going anywhere. It’s going to be a part of the process either way. Depending on the cost of your home, those fees will be attached. It could be anywhere from $1,000 to $5,000 depending on the size of your mortgage.

But some of these others that maybe we’re going to discuss, maybe there’s a little wiggle room here and you can have one lender compete against another for your business.

Brad: Yeah, and I think the one that jumps out in terms of that is the origination fees. You see that in, I don’t know what that means, on the face of it, but when you dive into it, it’s actually just the fee that these lenders are charging to process this application.

It’s pretty much, I wouldn’t call it a junk fee because clearly, you’re paying for service, but it is a fee that can potentially range into the thousands of dollars. There is wiggle room with this, because you are basically paying this company for a service to go through this entire process.

A lender that I’ve used here locally in Richmond, which this is not a national brand, so this is not applicable to everybody, but there’s a cap center company and they charge $0 in origination fees. They do not make their money on origination fees.

But in doing some background research for my own refi this past week or two, I’ve seen origination fees in the multiple, multiple thousands of dollars. So, it can range anywhere from zero to, I’ve seen $3,000 is a number that sticks in my head. That is something that clearly this is going to be a huge line item.

Jonathan: Other fees that might be involved, so you might have an appraisal or inspection fee. So, they want to reevaluate the value of the house. Part of this is coming up with a loan-to-value number to determine basically the health of this mortgage that they’re considering issuing.

What’s interesting is this, you might be able to have this waived if the house was built relatively recently, if it’s a 100-year-old, they might want to have it inspected again, I’m not sure. But the property inspection, in many cases, can be waived depending on the stated value of the home.

For instance, with a lender that I’ve used they basically looked at what the value was on my prior mortgage. They just asked me for it and I gave it to them. Then they just tested a couple of other values and there’s an algorithm that basically says above this point, for this home we’re going to need an inspection, below this value, whatever you put in here, then we’ll just waive it. You could probably have that waived.

Obviously if you can have that waived, it’s going to require less work for the people that are processing this loan. It’s going to probably save you anywhere from three to $500 in fees that would be associated. That was an interesting point actually, the loan-to-value, in terms of you getting the best rate and being competitive.

What gives you the best shot of having a great rate? Well, a great credit score will give you a better chance of getting a fantastic interest rate when you apply. Now, what I would say is it seems like 760 or above is going to give you the best chance at the best rate.

Then we just talked about loan-to-value. I was just doing some digging in my conversations. It appeared that to qualify for the best rate, you would want to have a loan-to-value of 75-25. We’ve talked about in the past how to drop under PMI, Property Mortgage Insurance, you need to have 20% of your value. You need to have paid in enough to cover 20% of the value of the home, have that in equity. But to get the highest tier, the best rate available, it looks like it’s actually closer to 75-25.

Brad: That’s worth slowing down on, Jonathan. I think that’s something people might not know necessarily right off the top of their head. Loan-to-value, basically, we’re talking about the percentage of the total outstanding mortgage over the total value of the property.

Loan-to-value, basically, we’re talking about the percentage of the total outstanding mortgage over the total value of the property.

As Jonathan said there, this is the equity that you have in your property. Let’s say it’s worth $300,000 and you initially put 20% down. That would be $60,000. So, your initial mortgage would have been, let’s say $240,000 in this case. Now, let’s say you’ve had this mortgage for a bunch of years, you’ve been paying your mortgage payment every single month, obviously, some of that is going to principal to pay down that original $240,000.

Let’s say right now your mortgage balance is a nice round $225,000. That means your value, as we said, is $300,000 on the property and you owe $225,000, so that difference is 75,000, which is your equity, and you divide $75,000 divided by the total price, the total value of $300,000, gets you to 25% in equity, or in this case, the loan-to-value being 75%.

It’s important to just have a sense of what percentage of equity you have in your total property here, because obviously the property is worth $300,000, that’s not what you own. You owe a significant amount on it. That’s where there’s nuance in this calculation.

Jonathan: Yeah. That’s actually interesting because now you’re actually talking about what levers can I pull. The one end was the loan-to-value is that the appraisal is to make sure the home was valued at whatever amount it was.

Let’s say you are in a hot appreciating area or you’ve done significant renovations that you’re not getting credit for since your last home was purchased, you might actually want to have this appraisal done because you know that your home is actually valued much higher and you’re about to get a new mortgage, you’re effectively getting a new mortgage. So, you’re like, wow, well, if my $300,000 house, because of the renovations that I’ve done and the work that I’ve done and the appreciating market is now worth $375,000, $350,000, $360,000 whatever that number is, that changes the entire loan-to-value equation and might actually be worth it.

If I have to pay $300, $400 for this appraisal, but I’m able to drop an extra 0.25% because I qualify for this better rate, it might actually be worth it. In many cases, when you’re working with a lender, a person, a human being, this is kind of a back and forth dialogue where you could strategize the best way to go about doing this to get yourself that best rate.

Couple other things just to consider that I was looking into. This is one thing, man, I don’t think you see this a whole lot, but I would be so angry if I did. Make sure your company doesn’t have any early repayment fees.

Brad: Yeah, this was the first question that I asked is, are there repayment penalties? That’s the simple question you need to ask your mortgage lender or your refi company, are there prepayment penalties?

Because clearly, you don’t want to be in a position where they’re just charging you potentially thousands of dollars in quite literally junk fees if you decide to pay off your mortgage early. I think that’s outdated or anachronistic at this point. I don’t know of too many, certainly reputable mortgage companies that have prepayment penalties, but unfortunately, there are people out there who are dealing with companies that aren’t reputable.

That’s why you have to ask the question and you have to see that in writing. It is essential that there are no prepayment penalties because if there are and you go to refinance at some point in the future, you’re going to get hit with these absurd fees because you didn’t simply ask this one essential question.

Jonathan: I’m amazed that you managed to appropriately weave anachronistic into a flow of thought, Brad. That was incredible.

Brad: Thank you, sir.

Mortgage Terms

Jonathan: All right, so a couple of others here. We talked about getting an interest rate, but I think it’s important to differentiate and talk about rates versus terms just for a couple of minutes here.

In my mind, I was only looking for a 30-year fixed. That was really the only option, but it isn’t the only option when you go to the site. I think you got a 30-year fixed as well. Talk us through how you would pick one over the other and why.

Brad: Yeah. I guess the loan payment schedule, the number of years you’re taking out this mortgage, this can make a huge difference in what your monthly payment is. For me, it came down to looking at 15-year fixed-rate mortgages and 30-year fixed-rate mortgages.

When we say fixed rate, this interest rate that I’m locking in right now would be good for that entire period. If I paid the payments for either that 180-month period or 360-month period, depending on which one I chose, my mortgage would be fully paid off at the end of that term. Now, that’s if I hadn’t paid any additional principal each month, but just paid my nice normal payment for 15 or 30 years, it would be fixed, I would know every single payment on the date that I signed that contract.

That’s the fixed concept, but for me the decision was, do I make the 15-year choice or the 30-year choice? Now, I’ve really jumped into these amortization schedules and the payment per month can be an enormous difference.

Now, obviously you’re paying off your mortgage in half the term if you’re paying it off in 15 years. So, the mortgage does not double though, which is interesting. You would expect if this were a straight-line thing, you would expect the monthly mortgage payment to double if you half the term.

Now, it doesn’t jump up quite that much, but it jumps up significantly, and a lot of that is going to additional principal each month. That’s a good thing clearly. This is not money you’re spending on interest expense that is thrown away, that you’re giving as, okay, here’s interest that I’m paying you for this mortgage.

No, you’re are paying down your mortgage balance, which is a good thing, but you’re contractually locked into paying that higher amount for the next 15 years.

Now, life happens, right? That’s one thing that you can never be sure, whether you lose your job, or even if, let’s say you just want additional cash flow to invest extra money. That might happen as well. It doesn’t have to be a negative life happens. It could be a positive.

For me, I would like to lower my payment as much as I possibly can because I can always pay extra. I can always, almost in essence make my mortgage a 15-year mortgage. Now, I am paying a tiny little interest rate premium. Now, this is the crucial piece here. When you’re locking in a 30-year rate as opposed to a 15-year rate, almost invariably, almost in 100% of the cases that I’ve seen, maybe 100% that I have seen, the interest rate is a tiny little bit higher.

Now, I’ve seen it as little as an eighth of a percentage point higher up to a little bit over, maybe a quarter or 0.375. So, you’re clearly, let’s make no mistake, you’re locking in that interest rate premium. So, you’re locking in that you’re going to pay a little bit more each month in interest than you would have otherwise.

But for me, the choice came down to flexibility. So, if I could get my mortgage payment locked in at many, many, many hundreds of dollars cheaper per month, and I could always choose to pay it off early if I wanted to. Now, if I could get it for that much lower per month and the only premium was 20 or $30 a month in interest, that was the decision myself and my wife were willing to make.

Now, lots of people take the 15-year option, and that is great, but go in with eyes wide open and make that decision based on your risk tolerance and what you think about your own personal finances.

Jonathan: It’s funny you pick the harder of the two to tackle here. The other ones that are out there like variable versus fixed. What crazy person would get a variable rate in the low-interest rate world that we’re in right now? Oh man, that’s the easy one. Throw the variable.

Do not get a variable rate when interest rates are as competitive as they are right now, and even if they aren’t, oh it would make me very, very nervous knowing that that could change anytime.

You’re going to see your list of options. It’s 30 versus 15 year fixed then you’ll see variable rates of different terms. Don’t do variable. Much more nuanced to your point when you’re talking about 15 year versus 30, and there’s actually a couple of other considerations on top of all the excellent ones that you just mentioned.

I think the one thing, the one point someone might … like my brother, I know my brother locked down a great 2.75% interest rate on a 15-year fixed. Wow, that’s amazing. But there’s a couple of things here.

One is, if you’re picking the 30 because the payment looks affordable and the 15 isn’t, it might be you’re getting too much house to begin with, with that. There’s something to be said there, on the one end, on the pro side. So, if someone’s like, “I can do this.”

My thought is, find a house where the 15 year it looks affordable and then go lock down the 30-year mortgage. That’s probably, now you have tons of bandwidth because you could pay it a 15, to your point, but you’re still anchoring yourself.

If someone is only looking at 15-year mortgages, at least they’re buying inside their means and they’re not going to be house poor. That’s a great just general framework. But go find a house that still looks affordable as a 15-year mortgage and then see what it looks like as a 30, now you’re giving yourself a lot of wiggle room, and that’s a nice parameter for how you go about making that decision. You’re impressed, aren’t you?

Brad: Yeah, I’ve never heard that analysis before. That is an interesting mental framework. Yeah, I’ve always looked at 30-year mortgage rates. That has never crossed my plate before, Jonathan.

Jonathan: But what if someone were to say, “Oh, I can’t afford the 15 year, but I could afford the 30.” Or even they up it higher until they get the … that’s like avoiding the lifestyle inflation.

Brad: Yeah. No, that’s very interesting. Jonathan, just to double back to adjustable-rate mortgages, obviously you were very strident about do not ever get it. There are instances, though fleetingly rare, fleetingly rare, to the point where I would say 99%.

Jonathan: Such as? Give me one example, really.

Brad: I’ll tell you. The funny thing is in 2004, I actually, willingly and overtly, got an adjustable-rate mortgage on my …

Jonathan: MK’s over there like jaw aghast.

Brad: Yeah. I was 100% certain that I would not be living in the property that I was living in, in five years’ time. Now, I guess someone who’s more intelligent than I would say, “How could you really be 100% sure?” Okay. Well, I was 99% sure.

Jonathan: Brad goes to basically 100% sure.

Brad: Sadly, I am a little bit sure of myself sometimes, and to my detriment, I’m sure. Now, that was an instance where maybe it wasn’t my smartest move, but the delta between the interest rate on a traditional fixed-rate and the adjustable-rate mortgage was significant at that point.

Let’s say I was 99% sure I wasn’t going to be living there in five years. That was a risk that I was willing to take. But let’s be clear, that was a risk. Because in five years’ time, if I was still living there, the whole concept behind the adjustable-rate mortgages, you are not locked in. That brilliant rate you were getting for the first five years, that can float significantly and it’s almost invariably going to float significantly higher.

My mortgage payments, I could have been in a world of hurt at that point. And now somebody would make the argument, was that really worth it? Was the risk of potential catastrophe worth the offset of the lower payments over those first couple years that I was living there? I don’t know that I’d make the same choice now, but that was the decision that I made at that point. I think there are some people who might say, “All right, this is worth the risk for me,” but I think they need to think very, very strongly about it.

Jonathan: Yeah, in fact, if you were to play that out just even four additional years, when you’re talking about 2008, you have individuals that it’s a hot market. You go on a house, one year later the house is worth $60,000, $70,000, $120,000 more. Interest rates are like only affordable as a variable rate, and they’re like, “Oh, this will work. The house is going to be worth twice as much 12 months from now or 24 months from now. So that balloon payment at the end, no big deal, whatever.” And just like, you can see how quickly it all turns when it goes the other way. Great point though. All right. I will walk back my dogma. Maybe there’s a fleeting chance.

But anyways, so this is good. I feel like we have a way of analyzing that break-even point, that break-even calculation. Basically, what you’re going to do is you’re going to take a look at that savings and payment. I’m putting the emphasis on payment here on the highest level.

Basically, what you’re going to do is you’re going to take a look at that savings and payment. I’m putting the emphasis on payment here on the highest level. Then what you’re doing is you’re then adding onto it, well, what fees are they going to charge, whether it be origination fees, appraisal fees, points, all the other stuff that can get added into that. These are the types of questions. What will I have to bring to closing and what percentage of that is just going to fees? Now, you have a realization about a break-even point.

Then what you’re doing is you’re then adding onto it, well, what fees are they going to charge, whether it be origination fees, appraisal fees, points, all the other stuff that can get added into that. These are the types of questions. What will I have to bring to closing and what percentage of that is just going to fees? Now, you have a realization about a break-even point.

For many people, I think if you’ve got a great one, it’s a break-even point within one to two years and then from there on out, you’re just saving money, for perpetuity for the remainder of the loan. But if you find it’s going to take you five, six, seven, 10 years to recoup the money, again, you might not be in this house five or six, seven years from now. Maybe you can figure out how to drop it.

Brad: Yeah, and Jonathan, just to add some flavor to that. So, you add all of these fees, add them all together and come up with that total number. It’s going to be certainly a couple thousand dollars. We talked about all these different fees, there are some taxes that will be factored in. Any type of origination, any of the appraisal fees, points, any of this stuff you add, you lock them all together and come up with the total fees that you’re paying.

Now, I would personally divide that then by the interest savings. But Jonathan is taking the more conservative approach and saying just divide it by the change, the reduction in the payment. Let’s say you have $6,000 of total fees and your payment is going down by $200 a month.

So, you would divide 6,000 by the 200 and you would get 30 months as the break-even at this point. So that’s two and a half years is the break-even. If you are pretty darn certain that you’re going to live in this house for more than two and a half years, then that’s the break-even point, and every month thereafter you’re saving that $200 a month.

I think that’s really the analysis. There are lots of people who … people move, right? That’s just the reality. If you’re locking yourself into $8,000, $10,000 of fees on a refi when you’re pretty certain your job or your life might take you somewhere else in the next couple of years, you might want to think, does this make sense for my life?

Jonathan: And then the one thing that I noticed, and this is bringing it back to my own anecdote, was that when I actually went through the process of getting this mortgage, I got a phone call from an unknown 1-800 number, and I never answer my phone. I just don’t. It’s the worst way to get in touch with me.

But I don’t know why, but I picked it up and answer it, and it was actually my mortgage company, my current mortgage company calling me to say, “Oh, by the way, how can we help you?” And I was like, “I don’t know. You called me.” And they were like, “Oh, well we can see that someone was pulling your mortgage details and so it looks like you’re refinancing, we just want a chance to win your business.” And I was like, “Well, that’s very interesting.”

So, I was like, “All right, I’ll have that conversation, let’s do it.” So they transferred me over and the individual was like, “Yeah, well, thank you. Get some details.” Then he’s like, “All right, and would you mind telling me what were the rate and terms for the other company that you got?”

I was like, “I don’t really feel like telling you that. I tell you what, I got a fantastic offer. It blew my mind. I want you to beat it. What is your best offer? I’m totally open to it. I like you guys. It’s been great, but that’s a really good offer. I don’t think you can.” So, he came back with a counter and offered me 3.25. He didn’t know what I had gotten. Right? I have no idea what it would have been, what he would have done in a vacuum if I had just gone to them directly.

But with this counter in place, with someone trying to grab my business, he said, “we’ll offer you 3.25%”, and then I said, “Okay, that’s actually amazing. I never would have thought that you would do that. What are the fees?”

Then he said, “Well, we have this many points,” and whatever, and there was all sorts of other stuff on there. I said, “To be honest with you, I have almost no fees with this other company that I’m going to go with so it’s not really competitive.” He’s like, “Well, let me see if we can get those waived.” He said, “Give me a copy of what you have and I’m going to go and take my manager and see if I can get you something even better.”

My point here is that, there is … if you have been paying your loans on time and in full, you are valuable to your mortgage company. They know they have someone, like this is the company that bought your premium loans. When you initially go and you go through whatever company you make your first payment, and immediately if you remember, they probably sold your mortgage, they bundled it and they sold it off to another company. That happens all the time.

Now this new company probably considers your loan a premium mortgage. You pay on time in full the amount that you’re supposed to pay each and every month, they don’t want to lose you. There’s an incentive for them to probably go even a little bit below market value to keep you because they know that you’re not risky.

That’s really something worth to consider, so if you go out and get a rate, it doesn’t have to be the best rate in the world. It should be good, should be competitive, but then maybe just see if there’s a way that you can give your mortgage company a chance to beat them and do even better with some of the information that we talked about in mind, and I wouldn’t be surprised if you do. Anyways, from your friends here at ChooseFI, your one action step this week, let’s take a look and see if we’re getting the best refinance rate possible. All right, everyone. On this next segment, we’re actually going to be speaking with founder, Steven Chen, about his software, NewRetirement.

NewRetirement With Steve Chen

Jonathan: It is an incredible compilation of calculators for people on the path to retirement, and really increasingly, he’s been looking at how he can serve the Financial Independence community. I think this will be a valuable use of your time. With that, Steve, welcome to the podcast.

Jonathan: So what I wanted to do in this next segment is, one of the things that is so cool is when you have people that have reclaimed bandwidth and are very passionate about a cause. They end up taking their talent stack they’ve developed over time and figuring out a way to solve a problem.

So on this next segment, we’re actually talking with Steve Chen. He is the founder of newretirement.com, and this is one of the few tech services that our community loves, which is basically a requirement for us to then highlight it for the rest of you guys.

Because although some of our community loves it, you may not. You may never have heard about it. I think there’s a lot of value here. And there’s a lot of value both in the mindset that Steve brought to this set, this suite of tools that he’s built. But also for an individual that’s thinking, wow, I’ve cultivated this skill set and I want to flesh out that talent stack and solve problems, I want you, as you listen, to think about it from both ends. So with that, Steve Chen, welcome to the ChooseFI podcast.

Steve Chen: Jonathan and Brad, thanks for having me. I really appreciate the time and opportunity to be in front of your audience.

Jonathan: So Steve actually want to give our audience a little bit of a sense here of who uses the services that you’ve started to build over at newretirement.com. And I know you have had well over 100,000 people come through and actually start to put their data in there and figure out how to start mapping out their trajectory.

I know that when you started, a lot of this was actually targeting somewhat of an older audience, a wealthier audience. Maybe people that have a net worth in between a half a million to $2 million and were trying to figure out how to start planning out their glide path and make sure that they had put in the appropriate calculations to make sure that they had a solid retirement.

And maybe, I’m curious, I’m sure you can round that out and give our audience a little more sense of why you build it. But my understanding is part of why NewRetirement exists is because you want to help your mom.

Steve Chen: Yes, Jonathan. That’s exactly right. The foundation story here, the genesis, is that, my mom came to my brother and I in her early sixties and frankly she needed to borrow 10,000 bucks that year. And so my brother and I were like, okay, sure we can definitely write you a check, but we’d like to better understand what’s going on.

And so first we wanted to see if we could outsource this, if we could find an expert, a financial advisor that could help us figure out her situation. And we looked around and really we couldn’t find anybody that knew a lot about decumulating assets. How do you go into retirement and be smart about spending the money that you have.

And also we couldn’t find people that were that interested in her either cause her net worth was maybe a quarter million dollars at the time.So, we ended up doing it ourselves. My brother is a Stanford MBA. I’ve got a background in financial services and I ended up doing this on spreadsheets and the solution wasn’t save and invest better.

The solution was look at expenses, look at home equity, where you’re living. I mean essentially we helped her relocate to a more efficient, lower cost of living area. You know, she was living in a 5,000 square foot house on 10 acres of land with two people. And we’re looking at the cost to heat that, this is an upstate New York, and the costs were very high to maintain this.

And so we ended up making a lot of fixes across how she was invested, where she lived, what her expenses looked like. And we looked at things like annuities and healthcare and things that could increase her income, lower her taxes and help her do better with her health care. So that’s how we originally got into this problem.

And then with regard to the name, this actually goes back to her as well. So she worked in advertising and I remember her telling me when she was young it was like, hey the biggest word in advertising is the word new. Because it always brings people back. They want to learn what it is. So I was like, all right, we’re thinking about this space, NewRetirement and the domain was available. And so we’re able to buy the domain for like 1,500 bucks when we started the company. And turns out coming right behind us was American Express doing trademark terms, searches and stuff like that. On the same term, we ended up trademarking and getting a domain. So that’s how we got to the name and why we stuck with it.

Brad: Wow. That, that’s a pretty wild story, Steve. I like that. I’m curious, how quickly did you realize this is something that would be applicable for more than just your mom? How quickly did you realize or there might be something here that we can build that’s going to help tens if not hundreds of thousands of people.

Steve Chen: Yeah, Brad, that’s a great question. We were doing this and so we got on spreadsheets and then as we dug into this we said oh, look at the demographics. There are 75 million baby boomers out there and they’re facing increasing longevity. And then it turns out they have all the money.

I mean, for better or for worse, there’s $107 trillion of net worth in this country. 75% of that, about $80 trillion is controlled by people over 50. A lot of it’s tied up in houses and a lot of the rest of it’s in 401(k)s and taxable accounts and small businesses. So we looked around and we said, there’s really nobody that’s solving this problem at scale. The solutions were, talk to a financial advisor and they kind of want to talk you if you have 2 million or more.

And otherwise, there wasn’t great software. There were some books, and now there’s better services like what you’re doing, building a community and, and things like that. But we felt, hey, there’s not a great solution here, so we ended up creating the software to do it.

And just for my background, I’ve worked in financial services, but also I started a company in the 90s around the transition to higher education. It was a super early SAS company, so software as a service. And we’d network together universities, high schools and students and their families. And we took that process, which was on a book that Peterson’s books for like how do you research a college and figure out where to go to college. And we put that all online. So college searching, inquiries, applications, so forth.

We took that same approach around what we were doing there for education and we put it here for retirement, so the transition to retirement. And just real quick, just to back up on our user base, we built this to help anybody. It wasn’t built to help wealthier people. It turns out, organically, 130,000 people show up at our website every month, 80,000 people have built plans. Those users tend to be millionaires and the average user has $1 million. So they’re 50 to 65 year olds and they’re definitely this mass affluent.

That’s who’s organically showing up. But the tool was designed and built to help anybody figure out how to make the most of what they have. And again the solution isn’t traditional just save and invest. That’s part of it. But it’s also expenses, social security, healthcare, long-term care, taxes, housing. Those are the things that we really dive into and what user’s like to do on our product.

Jonathan: All right, cool. So actually what I thought we could do and what I love about new retirement is it’s not just one calculator, right? It’s a series of calculators that really is set up to help you figure out various aspects of your life.

And I thought at the most basic level I could come up with to give our audience an example is we could just go look at a retirement calculator. And one of the things I always hated about typical traditional retirement calculators is that they actually capped your retirement age. Literally when you’re working down the retirement age, it wouldn’t let you get below 50 or something. Well you can’t retire before that. So why even set it up to do that, this will allow you to put in any number you want, right? Without dogma. Do whatever you want.

So I’m actually on the page right now. We’re going to do just a sample calculation to just take a look at how this works. If you’re watching on the YouTube channel, you can watch along with us, but if you’re listening to audio, I think you’ll get the sense of what we’re talking about.

So we’ve got it all set up for you here. This case study, I am 45 years old, right? So what I love about NewRetirement is it actually looks at it as if you are… it’s telling a story, right? Tell your story.

I’m 45 years old. Put the input in there. My monthly pretax income is $7,000 I have saved up to this point $200,000. So you’ve got a $200,000 net worth. Every month I spend $4,500 and I save $500. So we put all this in and we run a calculation and we get some amazing data on the side here. What does my income look like if I retire at 66? And so Steve, there’s a lot of great information on here. I thought maybe you could help me parse how you figured out what to put on this page.

Steve Chen: Sure. Yes, we’re trying to make this as basic as possible to start, but there’s a couple of things that we’re doing.

So one is you know, on the left you’re entering your core scenario and on the right you’re seeing your controls of what happens if I retire at a particular age.

One quick thing, we’re focusing on income versus assets and that is one big difference about what we’re doing. Most people, and in financial services they talk about accumulation and saving as much money as possible. When you go to ask yourself or when you go to try to find out like how much do I actually need to retire? The answer is most people don’t have an answer and it’s really as much as humanly possible because the whole financial services industry makes money on you having money with them and they’re charging you basis points, so they’re charging a percent of assets. So we’re really focused on this whole income part of it.

But back to the calculator, yes, so if you switch views, you can go from an income view to a savings view. And if you scroll down a little bit we give you kind of a more detailed projection about your savings. And then above that you’ll this kind of savings timeline view. There’s a little tab there, I don’t know if you can see to the right of the blue thing. Yes, and then to the right of that there’s net worth. So some different quick analytics about what your projection might look like.

So in this case with your net worth it’s rising until you go to retire and then you start decumulating it and then you run out of money. And then we have this red like unfunded liability that builds up. So essentially you want to think about how you’re going to bridge that gap.

Jonathan: Nice. So when you see red, that’s not ideal. You’re like, oh I’ve got to solve that. But then there are other considerations, other tools that you could work with to actually then solve that. But now you have it charted out and it’s hard to make changes if you don’t know where you’re headed currently.

Steve Chen: Well, yes, but if you go back up to the lab, you could change a couple of things on your entries. So for instance, if you’re a FIRE person and say that your income is 8,000 a month and your spending is 4,000, and you’re saving 2000.

Jonathan: The chart looks much better.

Brad: No more red.

Steve Chen: And click on savings timeline. Go back down a little bit on. Sorry, one more to the left. See a little FIRE icon?

Jonathan: You added a FIRE icon for us!

Brad: Yeah, I saw that in the notes below that there would be a FIRE icon that shows up. It’s so great. And it’s neat that you have the what if I dot dot dot on the left hand side. So it’s reduced expenses by 10%, delay social security to seventy. So you have all these little things that’s showing, okay, if I make a minor, little adjustment, what happens if.

So that’s a very cool little feature there to help people game out the ramifications for making those little choices.

Steve Chen: Yes, we’re just trying to tease out or kind of indicate to people that this is what is possible. People really use our site to make good decisions. They want to make informed decisions.

And what’s different about what we’re doing is you need to look at your whole financial situation because everything hangs together. So some of your users in your community they’re asking about, okay I want to do. In fact, there was a user this morning, they had a pension and they were thinking about doing a Roth conversion ladder, to get their savings to be able to come out tax-free. And those are the kinds of things people can do inside of the advanced tool that we have.

But because of the whole plan hangs together people have to look at, hey, if I make a move here with my qualified assets, does that affect my federal and state taxes, my capital gains taxes.

If I moved from a high-cost living state, like I live here in California to a tax-free state like Washington, what does that mean? And so the more advanced platform lets you see how these changes hang together and try different things out. Essentially, do a bunch of what-if analysis and look at what happens if I do this or I do that.

Brad: So Steve, let’s talk through a couple of examples of just what could possibly be run. Obviously we’re not going to run every little scenario here, but buy versus rent, is that a specific calculator that’s in there?

Steve Chen: Yeah. So a really quick bag up, the tool you’re using is totally free. No one has to register and they can just go in and mess around with it. There’s also a planner tool that’s free and people can kind of build their whole scenario. It’s essentially document everything that you’re thinking about doing in your plan. And then there’s a plus version, which is a paid tool. We do offer a 14-day free trial, and that’s what gives you complete control over and an ability to model more advanced things.

But Brad, to answer your question, yeah, in fact, a user this morning in your Facebook community was asking, okay, should I consider renting, buying a house outright or buying a house with a down payment? And again, hopefully people don’t see this me as spamming the site. I was like, okay, this is a perfect use case for our tool.

So the person can go in, enter their situation, they can create a baseline scenario. Whether, listen, I think I’m going to rent and pay $1,000 a month, what does that look like? And then they can do another share. I would listen, I think I’m going to take $100,000 out of my taxable account or whatever the full price is, pay off the house completely. I’ll have no rent, I’ll have property taxes and house maintenance, but I’ll have less money to invest today. What does that look like? And they can build another scenario for that.

And they can build a third scenario where they’re like, okay, what if I instead take $30,000 for the down payment and then invest $70,000 what does that look like? And the tool lets you control for what kind of returns you think you’re going to get, if it’s taxable or tax-free dollars, what are your federal and state taxes based on where you’re living, what do your capital gains look like when you actually go to liquidate this stuff?

So that’s the kind of thing the more advanced users are using. But the tool is meant to help people on their journey. From hey, I’m just getting started I want to see where this is going. To you know what my situation is getting more complicated, I’ve got bigger decisions to make and I want to make smarter decisions. To like, hey, I think I can do this all myself. I just want to do this and then talk to my CPA sometimes.

Brad: That’s very cool. So, okay, I have a request for a calculator if it doesn’t exist already. So this is very selfish, but I have a car situation, let’s call it.

Jonathan: The golden boy calculator.

Brad: The golden boy calculator. This might exist or it might just be some very similar to what we just talked about with rent versus buy in essence. But my car, it’s worth about a thousand bucks but it needs some repairs and it seems like it continually needs repairs, let’s say.

So I’m contemplating, and I’m having this argument, or pseudo argument, let’s say good natured argument with my wife about do I buy a new car? And let’s say I was going to plunk down 12 grand for a new car, or whatever the number is, people are going to get mad at me for spending that much, but let’s just hypothetically say 12 grand.

But I guess in essence, a net worth horse race between these two cars. If I keep putting in 600 bucks a year in repairs on my piece of junk that I have versus buying a new car and presumably there’ll be fewer expenses, let’s say. Is that something that exists or you could create?

Steve Chen: Yes, totally. The platform is built to do this for anything. I mean the example on the house is a big one, but car, same thing. You have a baseline plan where, hey Brad, I’m going to keep my 17-year-old car and want to keep pouring 600 bucks a year into maintaining that thing.

And you can build another scenario where you copy that whole thing over and can say, all right, instead I’m dropping the maintenance costs, but I’m going to pop down $10,000 or whatever the cost is for a new car and or have debt associated with it. So layer in my car payment, what does that look like at what percentage?

And then project these both out and you’ll see the impact. It forecasts your entire financial situation, all your income, your net worth, your expenses, savings, taxes and everything else through your whole life. And you’ll see the terminal result of that.

Jonathan: Brad, your car is a classic, and it’s trending towards becoming a collectible.

Brad: It is, it is.

Jonathan: How do you put a price on that?

Brad: I know. No, it’s true.

And obviously my selfishness aside here, Steve, I think that would be cool to see because that’s something that I don’t have Excel sheets to create to run that horse race. But I thought, okay, if I invest that 12 grand and I’m going to earn 7% on it, clearly there’s a good bit of money that could offset a lot of those expenses that I’m paying otherwise. And what would my net worth be? So it here to forward it’s just been a intellectual pie in the sky. But I’d love to run that.

Steve Chen: Yeah. And just really quick on that, one quick comment. I think this is something that we’re seeing, Brad. We’ve had 80,000 users. Every month we have thousands of users in their plans. Sophisticated, financially educated people running different scenarios.

And so what’s happening is I think about us like Waymo like the self driving car, or like Tesla. We’re learning with all these users very quickly, just like you guys learn in your community and feed that back into the podcast and you take lessons. Same thing with us with our software.

So we’re seeing what people are asking for, seeing what their challenges are. And we’re building that in. And every time we update the software, it’s very scalable. So for instance, the SECURE Act just passed. So that changes the date for requirement of distributions, which used to be 70 and a half and is now 72, so we upgraded 80,000 plans all at once and everybody gets their financial income in retirement updated all at once. So things like that is where we’re starting to see the real power is learning quickly and then kind of upgrading everybody at once on this platform.

Jonathan: Yeah, I can just say from your listeners, Theresa in our group actually shared her experience. She said, I stumbled upon NewRetirement on my own, had a question, left a comment and much to my surprise, the CEO, Steven called me to seek feedback and answer my question. I’ve been a fan ever since. Used the tool for about a year. It’s regularly upgraded and improved. Great tool insights.

So just for our audience, you’re hearing about this, we talked, obviously this very basic retirement calculator, which is so much fun to play around with the numbers. But then it will go as far and it’s as advanced as you could ever possibly want. Everything from capital gains and RMD calculations to buy versus rent calculations. Maybe if they’re lucky at some point, a sponsored golden boy calculator in existence and so much more.

If you’ve ever had a what-if question about your finances, Steven’s kind of been thinking that whole line of thought for the last several years and as you just said, his ethos is designed to get closer to what users need and are looking for. So if you want a responsive software, definitely give it a shot. Check them out. Steven, if people want to follow up on this and check out NewRetirement, what would be the best way for them to do that?

How To Connect With Steve

Steve Chen: Sure. There’s a domain that they can go to newretirement.com/choosefi and if they register they’ll be linked up with this community. So we can kind of understand more about what people are looking for, track how they’re using it.

I mean, I do want to say that, Jonathan, obviously, you were on our podcast and that was, that was awesome. I really appreciate that. But you know, we learn a ton from the FIRE community. And in a lot of ways the FI and ChooseFI and FIRE community is leading the way in terms of being one super active, and taking control of their lives and their finances and then thinking about ways to hack it and do better and be very intentional about it.

And so there’s so many lessons that we take from FIRE and then try to build into our product. And we think ultimately we are seeing more and more younger users that are using it. But the traditional retirement people, they have to do this.

So FIRE people are opting to do it and they can always like, hey, if it doesn’t quite work out, they can manage risk by working a little bit longer. Someone who is 60 years old, they may not have that choice. They need to make all the best decisions. And one of the big things is we are learning and applying these lessons from FIRE to this group.

Jonathan: Steve, thanks so much for joining us on the show, man. It’s been a blast.

Steve Chen: Yeah, Jonathan and Brad, really appreciate your time and the opportunity to be here.

Jonathan: Huge thanks to Steven for joining us on the show. If you’re wanting more information, you want to run your own, what if, calculations, then just go check out newretirement.com/choosefi.

All right, well let’s go and switch gears. I want to bring in some feedback from the community. MK, what do you got for us today?

Community Feedback

MK: Well guys, for the past few weeks we have been talking about how great it is that we have our local groups that are getting together, and Brad threw out a challenge two weeks ago that he would love to have one month where every group globally tries to get together.

And last week we upped the stakes and said, no, let’s try to plan one day where every local group does some kind of event and we can feel connected that we’re all doing something. So we have arbitrarily chosen our ChooseFI Day. This was just the date on the calendar that seemed like a good idea, and it’s May 9th. Saturday, May 9th, 2020 is going to be ChooseFI Day.

Your local group should be getting something together. If something hasn’t been created in your local group, create an event, do something, host something at a park, do a picnic, do a get together so we can all get together on ChooseFI day, May 9th.

Jonathan: May 9th. Man, I feel like there’s a hidden message in there. Why was that day picked? You tell us, what was it? We’ll tell you if you’re right.

Brad: Completely arbitrary as MK said. But MK, I love this. Like you said, it doesn’t have to be something grand. It can be for people getting together to play board games. But we’ve talked for three plus years now about this being about the community, and it starts from one little meetup.

Again, we’ve randomly picked this one day, but let’s make it something that we can all shoot towards, right? Every single local group, we have 300 of them throughout the world, let’s all make that the day that we get together. I really love this, and I’m excited to hear what comes from this. You never know the benefits down the road of all these relationships, friendships, business meetings. Who knows what could happen just from these 300 meetups.

Jonathan: I have marked it off on my calendar. I will be there.

MK: Great. In the local groups, we have events going on before May 9th.

So we have some great news from ChooseFI Detroit, they now have 500 members. Congratulations.

And ChooseFI San Diego is putting us all to shame with 1,613 members. So they are a very big group. So, if you ever head out to San Diego for fun, you will find somebody you can hang out with from the ChooseFI group because there’s a lot of them.

Jonathan: That is amazing. 1,600?

Brad: That’s remarkable.

MK: And 13.

Brad: And 13. Do not forget the 13.

Jonathan: Yeah, 13, and freakingtastic. This is it, man. I think what we’re seeing, like the Financial Independence movement is at its core a grassroots movement of people that feel so compelled by this idea, this message that you really can be better each and every day and you can reclaim decades of your life in the process that they want to share it with friends and family.

The local groups are the single best way to do that. Join us, be a part of it. If you’re not already a part of a local group, you can find one in your area by going to choosefi.com/local, and if there is not one in your area, then it’s been waiting on you.

Just send us a message at [email protected] and we can help you get one started.

MK: This weekend we actually have several events going on.

This Saturday, the 22nd, ChooseFI Lexington, Kentucky is going to have a DIY tax party. So, for anyone who regularly files their own taxes or is interested in learning how, check that out.

Then on Sunday, the 23rd, ChooseFI Alaska is having their first meeting, and ChooseFI Tampa Bay, Jason and I’s local group, we are going to be meeting and doing board games and brews at the Crooked Thumb. So, I can’t wait to see people there.

Jonathan: What board game do you have picked out?

MK: I don’t know. We are running two races back to back Saturday and Sunday. So we are showing up wearing our medals totally exhausted and we will just play what is in front of us. That is our plan. Not picked out a board game.

Jonathan: All right, fair enough. Let’s see.

MK: Wait, hold on. I have more, I’m so sorry.

Jonathan: Fair enough.

MK: And then we have new local groups in Valencia, Spain and Guadalajara, Mexico, and a new cohort group for parents with special needs children. So, if you are in Spain or Mexico or you’re a parent with a child who has special needs, check out these new groups.

Brad: Awesome.

Jonathan: Cool. All right, awesome. I think one of the thing we announced last week was a FI Households series that we’re rolling out. Give us the update there.

MK: We had this concept of doing the FI Households. Internally, we’ve been calling it the six FI Households because we’re hoping to get six really great stories, but if there’s more, if there’s less, that’s fine. But if you go to choosefi.com/documentary, you can apply to be part of this series where we are trying to highlight people who are new to FI and follow them on their journey.

So many of us who have been part of this movement for so long, we don’t remember those first few months, those first few decisions that when our guests come on and they talk about, oh, well, we just moved or we just sold the car or we did this. It seems easy in retrospect, but we want to follow people as they’re going through these decisions and highlight them.

So we want to highlight people from all different walks of life, from around the country, around the world, different households just to see how everybody is dealing with FI and what are the different voices and faces of our community. So, if you are interested in being part of this and comfortable with being on camera, go to choosefi.com/documentary and apply.

Jonathan: All right, well every week on the Friday roundup, we do a drawing for a copy of a book that we have found useful and we’re picking from our books here at ChooseFI Publishing. We have ours, Choose FI: Your Blueprint to Financial Independence, and Rob’s book, The Simple Startup series. There’s an option for an instructor manual or a student manual and you can pick either one of those.

To enter the drawing, if you’re interested, all you need to do is just go to choosefi.com/itunes. There are some very simple instructions there. Leave us a short written review on your platform of choice, whether or not that be iTunes or Stitcher.

And then send us an email, the feedback at choosefi.com, letting us know that you left a review and what screen name you left it under. We’ll give away one book for every five written reviews that we get and we announce the winner on the Friday Roundup. So, MK, how many winners do we have today?

MK: Well guys, today we have one winner, and that is Justin.

Justin writes, “One of the top-notch financial podcasts out there. It is informative and entertaining, and above all, motivating, and with every episode, I get fired up to make the best choices, even if they are hard, that will lead me eventually to Financial Independence. Brad and Jonathan are both great interviewers and do a wonderful job of highlighting their guests and giving them room to share their expertise. They then also contextualize that information and link it to other ideas and concepts, which greatly enhances the experience of the listener… and no ads. Keep up the great work.”

Jonathan: All right, my friends, the fire is spreading. We’ll see you next time as we continue to go down the road less traveled.

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11 thoughts on “167R | Should I Refinance My Mortgage?”

  1. Hey there team! I’m excited to listen to this episode tomorrow, heck maybe even tonight.

    We’re in the process of refinancing since rates have dipped down To record lows. We’ve locked in a 3.25% refi which would be down from 3.875%.

    If we go through with the deal, we’ll save .625% and shave off about $100 per month from then on. We’ll be able to increase my wife’s 403b contributions by 3% which will get us exactly halfway to the 36% she’d need to max it out (That’s our next highest priority).

    We’re committed to paying off our outstanding student loans but we’ve also committed to playing the long game. Thanks to ChooseFI and Travis at StudentLoanPlanner, we’ve discovered that since we don’t really have any high APR loans, it would make more sense for us to build wealth instead of paying down the low APR loans.

    Good luck on the path friends!

  2. If you calculate the cost of the refi and it will take you 30 months to break even, something I have done in the past is accept a *slightly* higher rate (but still much lower than my current rate) in order to waive all fees such that I paid nothing to refi and my break even is immediately.

    Another time where a variable rate mortgage makes sense is when you could pay off the mortgage in full if you wanted to, but choose to get the lowest rate possible. I was able to get a 2.5% 7 year ARM and then took the money I would have paid on the house and put it into 3-3.55% 5-6 year CDs a couple months later when rates jumped back up. Now I’m getting paid for my mortgage! Caveat that my itemized deductions without my mortgage is already over standard deduction so if yours isn’t there may be more factors to consider.

  3. When you are calculating the break even point, you have to consider the length of the loan. For example, if you have 20 years left on your loan and you refinance to a longer term (say, 30 years), then your break even point will come very quickly, as your monthly payments will go way down. But consider that you will end up paying for an extra 10 years (120 months).

    When you are doing a simple break even calculation, it is best to match up the length of the loan with how much you currently have left without refinancing.

  4. I wanted to weigh in because I thought “catastrophe” was pretty strong and not necessarily accurate language to use to describe being in an ARM that adjusts. This goes without saying, yet it wasn’t really said on the episode: there are a wide range of ARMs and what you are financing out of, plus all sorts of other factors, really affects the cost/benefit/risk analysis.

    We refinanced the (VA) mortgage on our rental 9 years ago to an ARM. We didn’t have any intention of selling before the first year it would adjust. We were locked in for a few years at the lowest rate of 3% and then it was a 5/1 ARM, meaning that after a few years (I believe it was 3 years) it would adjust annually by no more than 1%. (In our case a couple of times it even adjusted down!) So even if rates skyrocketed, we would adjust no more than 1% a year. And the 5 in the “5/1” meant that we were capped overall to never go more than 5 points higher than the initial 3%, so never higher than 8%. Before we elected to go into that ARM we compared the worst case scenario (which would be the interest rate going up a full 1% each year after it started adjusting, and then staying at 8% for the entire duration of the rest of the loan) with what we’d pay over the life of the mortgage compared to the mortgage we were leaving, and the ARM won for lower interest paid over the life of the loan (and also taking into consideration refinancing fees, which are really low for VAs). So we were better off no matter what. No catastrophes in sight! And as mentioned by another commenter, we could’ve taken advantage of the super low monthly payment and used that time to pay down the principal more quickly, so that when the rate did start to adjust the principal would be much lower than it would’ve been otherwise.

    And then the icing on the cake is that we just refinanced — 9 years later — out of that ARM. Similar to Brad or Jonathan’s story, our current mortgage company knew that since we were in a ARM that we were ripe for the picking by other mortgage companies and they didn’t want to lose us. So they moved us out of our ARM into a new fixed rate mortgage (going from 4.375%, which is our ARM rate right now, to 3.375%) and the *only* fee we paid was the $750 VA lending fee. And we got to stay with our current length of mortgage and not have to go back out to a 30 year.

    And you briefly touched on this in the episode, but I’d love to highlight it even more. It’s NOT just about how much your monthly payment goes down. It’s really significant how much less you’re paying in interest each month and how much more you’re paying down principal. In this refinance we just completed, yes, our monthly P&I payment dropped by $67/month. But way more exciting to me is that also every monthly we are now paying $120 less a month in interest!! And we’re paying $72 more a month in principal. In just one year, we will pay $804 less in mortgage payment AND we also didn’t have to spend $1440 in interest! Plus, even with that lower payment we paid $864 more down on our principal, building our equity that much more quickly. (And these are really small numbers since this is only on a $150K mortgage that went down by just 1%. The savings are so much more for those who have a higher mortgage and/or have an even more significant decrease in their interest rate.)

  5. While I was listening to this episode I was interested in the comments made about getting the appraisal done on a house, especially if a lot of remodeling has been done. Would you guys be able to touch on the flip side of doing this and the potential for increased cost due to higher property taxes based on the higher valuation of your home? I don’t know a ton about how often the property taxes are re-evaluated so would love more information on that and whether it would be a worthwhile part of the calculation for benefit in savings. Thanks!!

  6. I feel like you have left out the effect of amortization on the re-finance analysis. It’s not an issue if you’re only a year or so into your mortgage.

    But I’m 12 years in on my 30 year fixed. I’m finally seeing the principal payment move every month when I make a payment.

    If I refinanced, even to a 15 year, I’m back to having virtually all of my payments going right to the bank and not into my equity.

    Right now, I’m largely writing a check to myself every month.

    How do you figure if that is going to be a good investment in that scenario?

    • Have you run the numbers on the 15 year? If you take out a new 15 year loan for the amount left on your 30 year loan and are able to lower your interest rate you will have more going into principle then currently even if you are starting out fresh.

      • For a new 500k 15 year fixed at 2.5% ignoring property tax and insurance, your first months payment will have $1,041.67 going toward interest and $2,292.28 going toward principle!

  7. Keep up the great work, guys.

    Brad, you’re right: folks DO NEED to verify a new mortgage has no pre-payment penalties. My partner is a commercial real estate appraiser. Just yesterday a borrower confided to him that his new loan will have a pre-payment penalty. So it’s rare, especially in the home mortgage arena. But it’s still a concern.

  8. I’ve been exploring refinancing options and have found the process overwhelming, so your timing with this episode couldn’t have been better! Thank you for explaining it so clearly. Without Brad’s comment about the nuance of paying less in interest, I would have continued only considering the lower monthly payment. This is a super informative episode — one that I know I’ll have to replay to ensure I get all the essential details. Thanks again, Brad and Jonathan!

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