It’s pretty common knowledge that mortgage rates increased from a year ago. But would it make sense to refinance to a HIGHER interest rate? In this episode, Chris Miles, the host of Money Ripples, illustrates how one client will increase her cash flow by paying more than DOUBLE the interest rate. Does that sound crazy? Watch to find out why it would be crazy NOT to refinance!
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Should You Refinance To A HIGHER Mortgage Rate?
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I want to talk today about a concept that came from one of our current clients. It is a situation where cashflow got a little bit tight. You know who you are because you already got this recording ahead of time. A shout-out to this client because I’m so grateful that she has a situation to prove this point that I’ve learned over the years. The mortgage interest rate isn’t all that it seems. I get it. This woman has a little bit higher interest rate than even I had on my own first mortgage. Yet, this is that debate I make myself.
The question is this. Right now, interest rates undoubtedly are higher. You probably have a mortgage that’s lower than the current interest rate. Does it make sense to refinance or not? That is the big question. When I was a financial advisor, it was always never. If this were the situation, you would say, “No way. Why would that ever make sense?”
However, as time went on, I realized that there are more elements in here besides interest rates. One, you got to understand that even if you had a 3% mortgage rate and now they’re double that, double sounds amazingly high. When you think about it from a simple interest standpoint, double is not that big of a deal. Let me show an example. If you had a 3% mortgage for $240,000, that is a $1,000 a-month payment. The payment makes a difference.
A 3% interest on a 3-year mortgage of $240,000 is over $1,000 a month. The total interest that you end up paying over that period of time is $124,000. Many people like to say, “I’m paying half of this in interest.” It is the same thing here, too. If you raise it to 6%, the interest goes from $124,000 to $278,000. It’s even more than double. You might say, “Would it make sense to refinance?” Especially where lately you might be getting closer to 6.5% depending on the rates, that’s almost $300,000 for a $240,000 mortgage.
When I was a mortgage broker, I used to teach people this was bad. I’d say, “In $292,000, you’re paying more than double what this balance is. If you want to stick it back to the bank, pay this off first. Pay it off as fast as possible.” That is exactly what the bank wants you to do. Does the bank want to pay off its debt? Even with all the bank failures going on, the banks that are strong and the ones that haven’t been taking a lot of risks, the thing they know is that they’re creating what’s called arbitrage. They know they can borrow money from you in debt, be able to churn around and make a higher interest rate than what they borrow it at.
For example, when they borrow money from you, they’ve taken it from your savings account, CDs, or money markets. They’re using that money specifically to create leverage. Let’s say you have a five-year CD that you’re getting paid for. Let’s say, right now, it’s 3.5%. However, they can churn around a loan on a car loan right now at about 6.25% or 6.5%. That is based on my current credit union’s interest rates. You might say, “That’s double.” They know the compounding effect. They know what that does even on the simple interest side. They know they’re making more money because it cost them none of their money. They’re paying you interest, but they’re making more.
It’s the same thing here. If you knew that you could take that money of what would’ve normally been $124,000 of interest you would have to pay over 30 years to a bank savings account at 3%, you wouldn’t like that so much. $124,000 that you have to pay over 30 years is expensive money, especially if somebody is keeping that money in there, but you don’t care. Why? It is because they’re paying you payments on that money.
They’re paying your money back in interest and principals. You’re getting that money back anyways. You’re using other people’s money, not even your own. If you churn around and you did loan that out at 6.25%, you made almost $300,000. Your net gain out of that total is roughly in the ballpark of about $170,000 that you made for free. It’s out of none of your own money.
Some people call it infinite return. I wouldn’t exactly call it that. Instead of an infinite return, even though that’s technically true because it’s not your money, I would say, “What’s the real profit here?” My profit is more than doubled. If I invest $124,000 to make $292,000, I’m going to say that’s a good win. Wouldn’t you? That’s exactly the concept we’re looking at here today. Can you create arbitrage? What is that you can create? Ultimately, what it comes down to for you is what does it do for your monthly income?
Let me use an example of Mrs. S. This is one of our clients here. In her first mortgage, she has a $64,000 balance. She’s getting closer to paying it off. It’s ten years left that she has on this mortgage here. She has 10 years left even at 2.875%. The $890 a month does include escrow. Even when I do apples to apples, I’m including that escrow, tax, and insurance payment here as well.
In her second mortgage, that 7%-plus is variable-based on the Feds. This is what’s making her stressed despite that they’re making her pay 1% a month. A $44,000 balance means she pays $445 a month. She also has ten years left on this loan. What will happen in 10 years, if she keeps going the path that she’s going, is she will have a free and clear home saving herself $1,147 a month. She’ll still pay taxes and insurance. That’s the total. $1,147 a month is the number to beat ultimately in 10 years.
Do we refinance or not? This is where it comes back to you as a steward. We are talking about what you are able to do with money. If you’re a gambler or spender, don’t even read the rest of this. Please stay away because you’re going to ruin this anyways. This is specific for people that know how to be wise stewards with their money and how to use this better.
She’s hired us specifically because we help her strategize and help her do things like this. We help find more money. We found other money in total with this. We’re finding over about $15,000 a year, but we’re taking this money and, ideally, investing it. She can invest this in a lot of different places. I’m going to use an example of her buying an outright and free and clear property first. We’re going to use that as an example. What happens then? I took a specific property. It had about $1,000 a month. It was a little over $1,000. I rounded it down. I put it at $1,000 a month net gain. That’s after they pay the property manager and everything.
The cool thing is that if she is able to get that $120,000, the payment is only $400 more a month. Our payment only went up $400 a month despite it going to a 6.375% mortgage. We locked the rate. We locked the 1st and 2nd into 6.375%. It is much higher than her 2.875%. People will say, “This puts me back. I’m going back 30 years.”
When this woman does the math here, she’s like, “I’m going to be well beyond retirement age when this mortgage finally gets paid off.” That’s not our goal here. Our goal is to get you in the best cashflow position possible and the healthiest financial position to do what the bank has been doing to you for years, yet, you haven’t done it. The reason the banks have done it well is that they know how to be wise stewards of their money. That’s most banks. We can’t trust those banks always. The ones that aren’t taking unnecessary risks and are doing the usual banking business that they’ve done for hundreds of years, that’s exactly what they’re doing here.
Her net gain is $600 a month. Already, by refinancing this mortgage and by investing that $120,000, she now has a $600 net gain. Her cashflow position in real life is better. That’s a huge benefit right there. In total, what’s that going to do in ten years? We’re increasing rents only by 3%. The average has been between 4% and 5% over many years, but we’re putting it at 3%. I’m trying to play devil’s advocate against this point here. The cashflow is $153,000 in total with appreciation.
I only put that at 3% appreciation on this property. That’s it. I didn’t put a huge amount of appreciation. It’s very conservative. Some of you saw 20% to 30% in a year. Sometimes, you got to have 1 or 2 years that could do all the appreciation and have a flat market the rest of the time and still hit this. There are no guarantees, but it’s not too far-fetched.
The total appreciation is almost $195,000. Here’s what’s great. Her mortgage balance is $200,000. What happens is that based on equity, cashflow, and everything else, she’s in about the same position. Here’s what’s important. That rent right there of $1,344 a month, remember that’s $200 more a month. $1,147 is what she would’ve freed up by paying off her mortgages free and clear. Here, she has a $200-a-month net gain. It only takes a few years before she has a net gain there.
She’s in a healthier position. She could sell off this property, pay off her mortgage, and be fine. She could be in the same position as before. The nice thing is she’s got cashflow coming in better than hitting zero. This is the problem. All the Dave Ramsey fans get you to the point of, “Pay off her mortgages. Pay off everything,” and then you’re at zero. You don’t have positive cashflow. You don’t have passive income. You simply have nothing. There is no payment, but you still have to live. You still have expenses in your life beyond payments. That’s the important thing to remember.
If she buys this with leverage, that is a completely different scenario. I even put this at a 20% per year conservative gain. That’s including appreciation because there’s a multiplier effect. When you only put 20% down on a property, there’s mass appreciation because you get more. This includes cashflow, which cashflows are depending on the property. It’s between 5% and 10% right now cash-and-cash. It’s not great, but appreciation helps. If you buy it with a mortgage, you also have renters paying down your balance for you. You’re gaining equity even if the property doesn’t appreciate.
I’m saying this is conservative, but if I say 20%, some of you guys will think it’s too good to be true. I’ve shared examples of different properties I’ve had. I’ve had properties I’ve had for 5 years that, on the ROI of my down payment, have done over 300%. To say that you can’t get a 20% per year gain is foolish. In many cases, it can be 30% to 40% per year depending on the cashflows. I try to be conservative and play devil’s advocate here. It’s 20% per year if you include appreciation and equity build-up from them paying on your mortgage balance. By you gaining that equity as the difference between the balance of the mortgage and equity gain, that’s what you get. That’s where the $700,000 of gains come from. Most likely, it would be selling and refinancing.
Either way, you would probably have, somewhere in the ballpark, between $5,000 and $6,000 a month of cashflows right there. That’s even healthier than $1,344 because you get that appreciation and those equity gains that you get when you buy it with leverage. Nothing is guaranteed. What if we cut that in half? $350,000 is still way better than where she was before. She would have, in the six figures, more money after ten years than having it pay off her mortgage.
Let’s say she put this into a fund. If she puts this into a fund, the $120,000, the interest is 10%. She compounds it annually. After 10 years, that’s still $311,000. There are plenty of funds and investments that are out there paying for this. It is sometimes more. We’ve even got funds that we’ve talked about on the show that have paid that kind of return or better. There are no guarantees. Anything can happen. There’s always a risk. I’m not saying that this is the case, but 10% for our clients is the baseline average of what they look at.
Think of this. 10% compounding on $120,000 gets you at $311,000. Remember, her mortgage balance after 10 years was supposed to be 0 if she paid it normally. Her mortgage balance could be about $200,000 after 10 years even at the 6.375% interest rate. That means she now nets $111,000 more than she would’ve had anyways.
It always comes back to cashflow. It always comes back to this full circle. What’s it ultimately going to do? What’s your real profit? What’s your real gain? That’s what we are always looking to do. It’s about creating the arbitrage. It’s about following the same rules that banks have been doing on you the whole time. It’s the banks that have taught you for years that you shouldn’t do this. Why? It’s because they love having your money locked up so they can play with your money and do whatever they want. Why not turn the tables around and be the bank yourself?
Notice I’m not even talking about infinite banking. I’m not even talking about taking the money and rolling it through this. This is purely cash. It is dealing with cash and doing the same thing to the bank where you become the one that creates arbitrage. You’re the one that creates a spread and makes more. When that compounds over time, you can’t beat it.
When you pull out equity from your house, I recommend you put it into real assets or something that is asset-backed like real estate. When people are feeling scared about that, I might say, “Do what I did in that example. Put into a property. Put into equity and something else because at least it goes from equity to equity, like to like.” If it’s coming out of your own house, that is great. Put it into something else that has equity but pays you cashflow or profits. It doesn’t mean that anything’s risk-free. It doesn’t mean that there won’t be bumps and bruises along the way.
I even had a client who bought a duplex. He was complaining after a couple of years. He said, “I haven’t been making money. I would’ve been better off in a 12% fund.” We looked at the equity gain he got from appreciation. He did have some positive cashflow from that. He had some negative experiences because HOA fees went up. I’m not a big fan of HOA fees. That is a tip for you. HOA fees went up beyond what they were predicting. It killed some of his cashflows.
He still made a net profit. He also made a $60,000 equity gain, which actually would’ve beat that 12% fund that he was trying to do. That’s the thing. There can be hiccups and things along the way. You might have cashflow restricted. You might have a situation where there is no appreciation gain for a few years. That’s very possible even in today’s current environment. I wouldn’t bank on the appreciation. Bank on cashflow. Make sure that there’s a spread.
This is the warning. If you’re going to use this mortgage strategy to cash out, you got to run the numbers. This is why we run these numbers with our clients to help them see this. Run the numbers because you need to have a positive net gain. You got to be able to service that debt payment. In that extra $400 a month, she needs to make at least $400 a month of cashflow. Is that possible with $120,000? Abso-freaking-lutely.
If you buy real assets that actually appreciate with inflation, which is always a big concern and is still going to be a concern in the future, that is a good thing for you. That is because you have a real asset that you’ve used that money. The truth is your home is going to appreciate whether you have a mortgage or not. That’s going to appreciate regardless. If you can get that equity out that’s earning 0% doing nothing for you and it is dead equity sitting there giving the bank less risk as you pay down your mortgage while increasing your risk because your equity is trapped in there, get that money into your control. Use it and deploy it in a way that gives you more financial freedom right now.
I can guarantee. This woman wants financial freedom. She doesn’t want it to be a twenty-year thing. She’s like, “Tell me. In ten years, could I be financially free?” The answer is this. Maybe. Possibly even when we did nothing else other than this one strategy. From buying certain properties and there’s that equity gain, that even gives her an extra $5,000 to $6,000 a month of cashflow passive income.
Mrs. S, I’ll let you decide. You decide what you think. Is it going to help you feel freer if you have an extra $5,000 or $6,000 a month? You tell me. That choice is always up to us. I will tell you it’s a much more happy time than paying off a mortgage and saying, “I have no payment. I’m at zero. I’m not anywhere close to having any income to get me out of the rat race.” That is where it needs to be focused. That’s why cashflow creates freedom. Cashflow creates more options in your life and more options to what gives you more freedom because you have the ability to choose what you’re going to do with your life. You can maneuver and weather bad storms when everybody else is suffering. You’re the one that actually is able to play it safe because you’re able to get that money out of prison and use it to your advantage.Cashflow creates freedom. Cashflow creates more options in your life. Click To Tweet
If you have any questions on this or you want to know how that might work in your situation, you can always reach out to us at MoneyRipples.com. If anything, this episode is specifically for our client, Mrs. S, but I hope this is valuable for you. I hope this gives you an insight into why even though it more than doubles your interest rate, it can still make sense. There are other situations where it wouldn’t, but in this one specifically, this is a no-brainer. This one is free money. This is an infinite rate of return off of your cash because you put no cash into it. Yet, you net $600 a month. That is pretty incredible. That’s my message to you. That’s leverage. That’s what banks do. You do the same thing to create freedom for yourself in your life today. Make it a wonderful and prosperous week. We’ll see you soon.
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