This means you’re likely going to talk to a Mortgage Broker who will take you through the process, explain the current rates and, if you’re lucky, explain the options you have available to you. I’m currently going through this process on two of my properties! One of the loans is with a major national bank and so I figured I would start there and see what rates they would offer me.
The broker I spoke with at this major bank was very professional and he knew his script backward and forward. However, I’m not the standard consumer. I explained to the broker, “I’m a real estate investor and I know how to run a financial calculator very, very well. So, my needs and perspectives are different from the standard person you talk to about refinancing. I’d like to explore my options and think outside the box a bit.”
He wasn’t all that forthcoming with options, so I tried prompting him with ideas:
- Paying points out of pocket to reduce the interest rate
- Paying points and rolling them into the new loan to reduce the interest rate
- Potential special programs being run by the bank
- Possible interest rate reductions that can be achieved through principal paydown
- Government home owner assistance programs for which I might be eligible
This is where I ran up against the inside of the box.
The broker immediately pushed back, “Most people don’t usually like to pay points out of pocket.” The “most people” phrase was going to spring up several times in our conversation. I get it though; he is used to doing these transactions in a certain way. I may very well not choose to pay points out of pocket, but I was interested in having the discussion so I could see what my options were. I tried to explain to him, again, that I understand he’s not used to it but I wanted to discuss these options because I wasn’t the average consumer. He decided to humor me and did the calculations (since I had my calculator in front of me, I was running the calculations as well).
He said, “If you pay one point, which would be $5,000, it will reduce your monthly payment by just under $50, so it barely changes and isn’t really worth it.”
That was the moment when I thought, “Wait a minute… he doesn’t know how to use his financial calculator.“
He has his refinancing software which does all of the standard calculations for him, but he doesn’t truly understand the numbers beyond his set of standard boxes. I asked him, “If I were to invest $5,000 and get $50 in return every month for the next 30 years, doesn’t that sound like a pretty good investment?” To his credit he simply admitted that he did not know. I continued, “Well, the actual difference in the payment is $47.81, and if I got that every month and it only cost me $5,000, that would be an 11% return on my money. So, if you have a suggestion for where I can invest an amount as small as $5,000 and get a guaranteed 11% return on my money for 30 years with virtually no risk… man, I am all ears.”
He didn’t push back on further discussion of potential options and we talked for another 30 minutes or so.
In the end, I decided to roll the points into the new loan and use the cash-on-hand to acquire a new property. I figured the new rental property could have a higher Return On Investment than 11% but even if it didn’t, the other benefits of owning another positively cashflowing asset were more important. The point of the story, though, isn’t about whether or not to pay points out of pocket: it’s about knowledge. It is crucial for you to understand how to use a Financial Calculator. If you don’t master this critical tool, you’ll have to rely on others. Those other people might not be masters of the Time-Value of Money, even if they work for a bank. Those other people may just want to force you into the mold of “most people.” They don’t necessarily understand your needs, desires and position!
Master your calculator, and you can protect yourself from bad deals and identify great deals!