Refinancing a mortgage

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Sometimes it’s easy to think the way to amass wealth is with grand slams or 80-year touchdown passes (or what ever analogy you want to use for that big move).  In financial terms it’s getting a $500k job or picking the next stock that will double in a month.  But I think the opposite.  Those big wins are rare and people can waste a lot of time and effort and money chasing them.

Rather, the best way to amass wealth is the little wins (the single hit or the 4-yard run up the middle).  In personal finance those “little wins” are things like we talk about here a lot: lowering your costs, saving small amounts every paycheck, making sure you get the 401k match.

Recently, the Fox family got another small win which will add up to something very large.  We are in the process of refinancing our mortgage.  It’ll save us a little bit each month but that will add up to an enormous amount when it’s all said and done.

Two years ago, the Fox family moved to Charlotte.  We bought a wonderful home, and like most people, used a mortgage to pay for it.  Also, as with most people, our monthly mortgage payment is our single largest expense.

Over the past two decades, interest rates have been at all-time lows, and that means that mortgage rates have similarly been at all-time lows.  When I first purchased a home in 2006 my mortgage interest rate was 6% and everyone was talking about how incredibly low rates were.  Fast forward 15 years and rates have been cut in half (or even lower).

To the point, we are in the process of refinancing as we speak, at this very moment.

When to refinance

The decision to refinance really comes down to a decision of taking on a little pain now (in terms of closing costs and other fees associated with the new loan) for a lot of benefit later (in terms of lower interest rates).

For us we had the following stats for our current mortgage:

Mortgage amount$800,000
Interest rate3.65%
Monthly payment$3,781

The simple math tells you that we’re paying about $30,000 a year in interest, or about $2,400 each month.  That seems like a really big number.  Even decreasing that a little bit could really move the needle.

Doing some back-of-the-envelope math, knowing rates were around 3%ish, I could save about $5,000 a year or about $400 a month.  Definitely that seemed worth it, at least to start the process.

I filled out a loan application on line and got bombarded by a ton of people offering mortgages.  After sorting through all the messages and picking the one or two that seemed best, I went through a process that all-in took about 10 hours of work plus sending a bunch of emails.

Ultimately, we got a 3% rate for closing costs of about $6,000.  This is taking candy from a baby.  It’s hard to imagine finding a better deal.  I’ll be charged $6,000 today (and I won’t even really pay it because it will be rolled into my new mortgage), for the ability to save $5,000 this year and every year after.  Easy money.

Going with a shorter mortgage?

We will be refinancing with another 30-year mortgage.  We could have gone with a 15-year mortgage and that would have knocked our rate down to about 2.88%.  Certainly, a lower rate is good, about $80 per month in savings.  However, it requires a larger monthly payment.  We could afford it, but I definitely think we can do better by investing that money.

In fact, that’s the same playbook I used to get my car for free.

So we went with a 30 year mortgage.

Going with an ARM?

The other option we had was to do an adjustable rate mortgage.  The way these work is they give you a really low rate for five years (hence a 5-year ARM), but after that the rate can adjust, almost always up.

We have used these in the past, both in Los Angeles and Greensboro, and it turned out both times that was the right decision.  ARMs make sense if you think interest rates will stay low, or you think you’ll move before the ARM is up.  For us, in the past, we moved before the ARM was up, so taking the lower rate worked.

Now, we are pretty well settled in our home so we don’t plan on moving until Mini Fox graduates high school (10 years away).  Also, it seems very unlikely that rates will stay this low.  Most people, me included, expect rates to go up.  For all those reasons, we didn’t do an ARM.

That left a traditional 30-year fixed mortgage, and that’s what we went with.

To pay points or not?

The final decision was whether we should take the normal rate or “pay points” to get a lower rate.  What this means is we could take the 3% rate and pay the normal closing costs ($6,000).  Or we could pay extra closing costs (about $7,000 extra, making the total closing costs $13,000) and get a rate all the way down to 2.65%.

This may seem more complex but it’s still a fairly straight-forward calculation.  Just doing the regular refinance would reduce our monthly costs about $400 per month, so we’d “pay off” our closing costs in a bit over a year.  No brainer.

By paying the extra points, we lowered our rate an additional 0.38% or about $150 each month.  Of course that cost us $7,000, so it would take us about 46 months to “pay off” the extra points for the lower rate.

Four years may seem like a long time, but then you remember that it’s a 30-year mortgage, and it doesn’t seem that long.  Even if we sell in 10 years, we’re still well ahead of the game.

That’s our story.  We’re going with a 30-year mortgage with closing costs of about $13,000 but that will lower our monthly payment about $600.  Like I said, taking candy from a baby.

And if you really want to nerd out, if I assume that I can invest that $600 each month in the stock market at historic averages, after the 30 year mortgage is done, I’ll have a tidy $730,000!!!  That’s almost as much as the mortgage itself.  Not bad.

Top 5 thoughts on the Covid stock market

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I know, I know.  I periodically test your patience by taking extended leaves from writing the blog.  I’ll use the excuse that everyone seems to be using right now: “Blame it on Covid.”  After almost two years of having to homeschool the cubs due to school shutdowns, I think I’m finally in the clear.

It has been a pretty wild year or so with so many things to talk about.  I’ll get to them in due course, but I wanted to cover what I think are the five most interesting/surprising/paradigm shifting thoughts that have emerged lately.

Here goes:

5.  US stocks are still the place to be.  Long time readers know each year I think about which stocks will do better, US or international.  Going back to 2013, US stocks have out performed international stocks.  Every year I think that this might be the year that international stocks turn the table and every year I’m wrong; US stocks come out on top.

A ton of people have written reams on this issue (me included), and there are a ton of complexities that I won’t attempt to cover here. 

But just looking at the numbers, US stocks have GREATLY outpaced the international stocks again.  In 2020, in the teeth of the corona virus and it’s impact on markets, US stocks were about 10% higher than international.  In 2021so far, it’s a similar story with US stocks about 12% higher.

This is certainly a curious phenomenon, and the stock market more than probably anything else forces reversion to the mean.  So we should expect international stocks to do better, but it certainly hasn’t happened yet.

4.  Covid gave us the greatest V recovery of all time.  Back in March of 2020, it was a crazy time for the stock market.  Things were in freefall, and we were comparing that market slide to some of the worst ever—the dot-com bust, the Great Recession, and the grandaddy of them all The Great Depression.

In the space of about 30 days, the stock market plummeted over 30%.  That’s crazy and steeper and faster than the Great Depression or the Great Recession.  At the time it was easy to think things could really go to hell.  Even the most optimistic (me included) thought we’d be in for a long recovery.

Yet, stocks completely recovered about four months later.  As crazy fast as the fall was, that recovery was even crazier and faster—totally without precedent.  Bear in mind, it took 25 years for stocks to recover after the Great Depression.  For the Great Recession it was five years.  This was four months.  Wow.

3. Politics don’t matter in finance as much as we think.  Last November Americans voted out President Donald Trump and elected President Joe Biden.  Obviously they are very different men with very different policies.

Yet, for all of that, and I’m really going to sound like a bitter old fox here (and maybe I am), has the country really changed all that much between the two administrations?  More to the point of this blog, has the stock market?  In the four years starting when Trump was elected the US stock market increased about 15% per year.  In the year since Biden got elected it’s increased about 35%.

Those are pretty heady numbers that speak to the fact that the US economy and publicly traded corporations are incredibly durable, despite what is happening in Washington.  A few years back I wrote a post to this very point; the stock market does great no matter who is in power and this is just the latest example.

2. Inflation.  This is probably the biggest unknown right now for the stock market.  Starting in April inflation crept up to about 5-6% and has been hovering there since.  This is a huge change from what has been a really long streak of exceptionally tame inflation.  Before this year, the highest inflation has been this millenium was back in 2008 when it hit 3.8%.  Now it’s over 2% more than that, and that’s a lot.  In fact, you have to go all the way back to 1982 to find a time when inflation was this high.

That’s all well and good, but what’s the “so what”?  All the official people are saying the inflation is temporary and it’s just a matter of the supply chain disruption kinks working their way out of the system like a snake eating a pig or something.  Of course, you’d expect President Biden and Jerome Powell and Janet Yellen to say that.  That sounds much better than: “Wow, we really screwed up and inflation is going to spiral out of control, so get ready for bad economic times like in the 1970s.”

We’ll see how this plays out.  If it’s temporary, then it won’t be a big deal.  However, if 5-6% becomes the new normal, that has HUGE implications on our personal finances.  We’ll see over the next several months.

1.  Innovation just keeps on trucking.  We know the stock market has done well, really well, through the corona virus.  There are a lot of things we can point to like government spending and such.  But I think it’s mostly just the meat and potatoes of the stock market—strong earnings driven by amazing innovation.

At the beginning of the pandemic, I mentioned five areas that I thought would really benefit from the changes.  Some of those were right and others not.  But the constant was that our incredible economy is thriving and innovating.

Just yesterday, Tesla stock rose to become the fifth company worth over a trillion dollars.  And that’s just driven by amazing innovation.  Same story with Apple and Amazon and a million others.  If you’re a stock owner, that’s made you rich.  If you’re a human, that’s made your life better.  We’re living in awesome times.

I hope you enjoyed this.  Did I get the list right?  Is there anything you think I missed?