7/27/2019 RefiNerd.com - Make Proper Decisions - Bill Hills, CMPS®
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Beforeyoubeginreading,IwanttostressthefactthatIamabitofananalyticalnerd.Thisisagoodthingformyclientsbutitmaynot
beoverlyexcitingfortherestofyou.Theextremeaccuracyofmy NetWorthAnalysisforRefinancing maynotbenecessarywhen
determiningwhetherornotyoushouldrefinance.However,thismethodwillhelpyouunderstandthetruemagnitudeofthebenefitof
yourrefinance(Idoalltheheavylifting). Areyoureallysaving$88,000overthenext5years…orisit morelike$34,000 ?Ithinkthat’s
importanttoknow…regardlessofyourNerdLevel.
IMPROPERREFINANCEANALYSISMostpeopleusethePaymentSavingsMethodwhenassessingthefinancial
benefitofarefinance.Thismethodwillleadtoveryimproperdecisionsin
manycases.Why?Because yourmortgagepaymentisnotacost .Onlythe
interestcomponentofyourPrincipal&Interestpaymentisacost(andto
takeitevenfurther,onlythe“after-tax”interestcomponentisthetruecost).
Thepaymentoftheprincipalcomponentinyourpaymentisonlyanasset
repositioning–fromcashtohomeequity.Thisprincipalpaymentdoesnot
impactyournetworth.
Contrarytopopularbelief,tomakeafinancially
properrefinancedecision,don’teverfocuson
yourmonthlypayment“savings”!
Thismethodcancreateadecisionbasedonaninaccuratecostbreak-even
point.Ifyouarerefinancinganagedmortgage,youwillbeledtobelievethat
your“costsavings”isfargreaterthanwhatistrue.Andviceversa…ifyouare
refinancingarelativelynewloan,youwillbeledtobelievethatyouare
savinglessmoneythanwhatistrue.
TABLE1-REFIANALYSIS CURRENTLOAN JOHN MARY
ORIGINALLOANAMOUNT $848,000 $710,000
AGEOFLOAN 10YEARS 1YEAR
CURRENTBALANCE $699,948 $700,436INTERESTRATE 5.500% 5.500%
TERM 30 30
P&IPAYMENT $4,815 $4,031
INTERESTCOSTNEXT12MONTHS $38,004 $38,272
PRINCIPALPAIDNEXT12MONTHS $19,775 $10,104
NEWLOAN JOHN MARY
LOANAMOUNT $700,000 $700,000
INTERESTRATE 4.000% 4.000%
TERM 30 30
P&IPAYMENT $3,342 $3,342
INTERESTCOSTNEXT12MONTHS $27,776 $27,776
CLOSINGCOSTS $2,000 $2,000
TAXBRACKET 33% 33%
COMPARISONS JOHN MARY
RATEDIFFERENTIAL 1.500% 1.500%
PAYMENTDIFFERENTIAL $1,473 $689
PAYMENT"SAVINGS"-YEAR1(improper) $17,675 $8,273
ACTUALINTERESTSAVINGS-YEAR1(Pre-tax) $10,228 $10,496
PRE-TAXQUICKMETHOD-YEAR1 $10,500 $10,500
AFTER-TAXQUICKMETHOD-YEAR1 $7,035 $7,035
NETWORTHANALYSIS-YEAR1(seebelow) $6,936 $7,051
InlookingatTable1above,thePaymentSavingsmethodwouldindicatethatJohnwill
save$1,473eachmonthbyrefinancing...butMarywillonlysave$689eachmonth...
eventhoughtheyarebothrefinancingthesameloanamountoutofa5.00%interest
rateloanandintoanewloanwitha3.50%interestrate.Inreality,thesenumbersonly
represent a payment differential, notan actual "savings". A better indicatoris the
annualinterestsavingsof$10,228and$10,496respectively.However,tocalculatethat,
youwouldneedafinancialcalculatororanamortizationschedule.Forthequickest-
andmost accurate - methods for evaluatinga refinance,please see the
"ProperAnalysis"sectiontotheright.
PROPERREFINANCEANALYSISVeryfewpeopleusetheTrueCostSavingsMethodwhenassessingthe
financialbenefitofarefinance.Ibelievethisissimplybecauseveryfew
peopleunderstandloanamortizationandthetruedynamicsofamortgage.
Thismethodwillleadtoveryproperdecisionsinmostcases.Why?
Becauseitensuresthatyouareonlycomparingtruecostcomponentsofa
mortgage.
PRE-TAXQUICKMETHOD
NewLoanAmountxInterestRateDifferential $700,000x1.50%=$10,500estimatedannualinterestsavings(pre-tax)
(Thismethodwillindicateaninflatedannualinterestsavingsbecauseitdoes
notaccountfortheongoingreductionoftheprincipalbalanceoranytax
deductibility)
AFTER-TAXQUICKMETHOD
NewLoanAmountxInterestRateDifferentialx(1-incometaxbracket)
$700,000x1.50%x67%*=$7,035estimatedannualinterestsavings(after-
tax)
(Thismethodwillindicateaslightlyinflatedannualinterestsavingsbecause
itdoesnotaccountfortheongoingreductionoftheprincipalbalance)
*assumeseligibilityfor100%taxdeductibilityofmortgageinterestanda
33%incometaxbracket
NETWORTHANALYSISMETHOD(seescreenshotsbelow)
IcallthismethodtheNetWorthAnalysisforRefinancing anditissomethingIdevelopedbackin2008asthefounderofMortguidance®-amortgage
consumerconsultingfirm.Inowuseitmyselfforproperrefinanceanalysis
formyownmortgageclients. Ittakesintoaccountthefollowing...
• PrincipalBalance ataspecificanalysispointintime
• CashSavingsBalance ataspecificanalysispointintime
• TaxSavingsataspecificanalysispointintime
• TaxCostsataspecificanalysispointintime
TheNetWorthAnalysisforRefinancingisaveryaccuratewayofcalculatin
the truebenefit,or the lack thereof,of arefinanceasit comparesto you
currentmortgageataspecifiedperiodintime(AnalysisPoint).Ittakesint
accountalloftheCOSTcomponents,aswellastheSAVINGScomponentso
each ofthemortgage scenariospresentedandcan help illustrate howth
variousloan structureswill impactyour networth relative tokeeping you
current loan in place. It will help you answer questions such as...Whic
scenariooffersthegreatestvalueovertime?ShouldIpaypointstobuydown
myinterestrate?HowmanypointsshouldIpay?ShouldIputmypaymen
"savings"inthebank,orshouldIapplyittowardsmynewmortgageandpa
downtheprincipalmorequickly?Or...whatifIjustkeptmycurrentloanin
place and paid down my principal more aggressively? Whatever you
refinance objective may be, the Mortguidance® Net Worth Analysis wi
enableyoutomakeamostwell-informedandappropriaterefinancedecisio
--whichmayevenbetoavoidarefinancealtogether.
TheNWAmethodsbelowwillshowyouthattheactualsavingsinyear1for
Johnis$4,936(thenetimpactonnetworthifyousavethepayment
differential)+the$2,000thatwaspaidinclosingcosts... foratotalsavings
of$6,936.Andtheactualsavingsinyear1forMaryis$5,051(thenetimpact
onnetworthifyousavethepaymentdifferential)+the$2,000thatwaspaid
inclosingcosts...foratotalsavingsof$7,051.
BillHills,CMPS®|LuxuryMortgageBanker|Chicago|224-848-4384|BillHills.com
Ihavebeenprovidingmortgagesolutionsformyclientssince1994.Asa19-year
mortgageindustryveteran,andCertifiedMortgagePlanningSpecialist®,Iamprepare
toprovideyouwithvaluablemortgageservices.Contactmeforafreebutthorough
analysisofyourrefinanceorpurchasetransaction.
7/27/2019 RefiNerd.com - Make Proper Decisions - Bill Hills, CMPS®
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ScreenshotoftheNetWorthAnalysisforRefinancing (John)
MakeWell-InformedFinancialDecisions.
7/27/2019 RefiNerd.com - Make Proper Decisions - Bill Hills, CMPS®
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ScreenshotoftheNetWorthAnalysisforRefinancing (Mary)
MakeWell-InformedFinancialDecisions.