Have you been considering refinancing your mortgage loan to get a better rate and save some money? Are you trying to decide what kind of refi to do? Maybe you want to eventually turn your house into a rental property and you want to lower the monthly payment. In this post, we are going to share how we decided what kind of refi would work best with our investment plan. Our goal is to help you see that there are other things to consider than just getting the best rate when refinancing your loan.
We have been researching refinance loans the last two weeks because rates dropped, and we finally made our decision to go ahead with one particular loan. We have the plan to eventually turn our home into a rental, so there were many things to consider during the whole process. I thought it would be good to share some of the thoughts we had when considering what type of loan to do based on our plan to eventually turn our home into a rental.
When doing a refi, have a plan
When doing a refinance, it might be easy to get swept up in going for the absolute best rate, especially when you have lenders competing for your business, and they are trying to convince you that they can beat anyone else. But what’s more important is to stay out of emotions and to think about your overall investment plan.
The reason it’s so important to know your plan is you need to be thinking ahead when it comes to your investments. Making a few “good” decisions earlier in your financial journey can have a HUGE impact down the road. It can mean the difference between having enough to retire early or forever struggling to make ends meet.
Lower your monthly by doing a mortgage refinance
Currently in our journey, we are paying a mortgage on a single family home in a college town with the plan to turn it into a rental home. As rates have recently come down, we discussed whether we should refinance the loan to take advantage of a lower rate. We spoke to a few lenders (it’s always a good idea to get a few expert opinions), and we plugged numbers into a spreadsheet. We quickly figured out that we could refinance and lower our monthly payment by about $300!
Spreadsheets are amazing for comparing costs, rates, your savings, etc!
I learned the importance of running numbers years ago when I joined a real estate network. Those free nuggets of wisdom were priceless as they have stayed with me for years and helped me make really good decisions in the critical moments that mattered. I learned things like not worrying about paying off your loan early, leveraging your equity, refinancing to reduce your monthly mortgage, what to look for in an area when you invest in a rental, the list goes on and on!
This information empowered me not only in that moment but for my future!
It gave me the tools to do more with my money.
This is the stuff we should be teaching in schools!!!
How we decided which refi was best…
Okay, back to our rental plan and why we decided on a particular loan…
Stick with me here because some of these little details are the things that make the HUGE difference I was talking about earlier.
When we ran numbers and compared loans, we realized our choice boiled down to refinacing with a REALLY GREAT rate (and included some out of pocket cost) or a PRETTY GOOD rate (with very little out of pocket cost).
What helped us make our decision???
The stock market…
Comparing refi loans can help determine if one meets your plan
When we plugged numbers into the spreadsheet and also ran numbers in a mortgage calcultor, we discovered the loan with the REALLY GREAT rate would actually tie up more of our working capital (cash) right now because it required more money out of pocket.
And what could we do with that capital to make more money now?
Invest it in the stock market!
Side note: I recommend checking out Personal Capital if you are interested in gaining control of your financial situation. Personal Capital is similar to Mint.com, but much better. It’s free, and it allows you to see your whole financial picture, including your investments.
(And while you’re at it, open and bookmark this post about how to easily invest in the stock market with index funds. There’s a video to walk you through the set-up!)
Paying off a home loan early can tie up investment money
We even realized that paying off the mortgage early would not make sense financially because we could use that working captial to invest it now.
Taking an extra day to make these calculations ultimately helped us to make our final decision- save the money on the cost of the loan and go for the no-cost loan with the PRETTY GOOD rate. There is no reason to tie up a big chunk of cash now that could go into the market (and potentially earn more in interest)!
It’s so important to keep your options open when you are making decisions AND to know your overall investment plan.
Stay the course.
Stay out of emotions.
And RUN THE NUMBERS!
Every little bit adds up in the long run.
You can find out more about our real estate journey by clicking here.
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