Every mortgage or refinance needs a goal; something bigger that we are trying to accomplish beyond simply buying/refinancing a home or investment property. The best loan is not always the loan with the lowest rate, but the loan that helps you get ahead financially.

Here are some “Refinance Rules” you may want to consider.

These are rules that aren’t hard and fast but are like the sites on a rifle… they help everyone focus.

Because a mortgage should not be an end in itself, but a means to a greater end.

Main refinancing rules…

#1) Elimination of consumer debt: (not tax deductible)

#2) Have a cushion of savings: ideally 3-6 months in a liquid, interest-bearing account.

After you close on a home loan, you’ll need a cushion of savings. They focus so much on the mortgage rate, that they will empty all their savings to buy a house. It is not a good idea! Tell me, does it matter to get the lowest rates in Texas if you don’t have $500 left to your name after closing?

This is one of the reasons why people should consider 95% loans. There is a myth that most people with good credit put down a 20% down payment, but most 80-90-95% home loan customers are Doctors, Teachers, Physicians, Engineers, Aggies, or Sooners. , which could easily put 5-10% down. They choose to keep mortgage down payments to a minimum so they can put more money elsewhere, such as money markets, buying investment homes, etc.

Refinance Rule #3) Pay off the house before 30 years and save a ton in interest…you don’t have to pay off your house 3 times over.

Go with the loan that gets you ahead financially. If it’s a 15-year refinance, great. But if you’re in debt and paying a lot of money each month, the best thing to do is go for a home equity loan. The fewer invoices you have, the better.

Mortgage rates go up and down…so chasing a magic rate is a bit stressful. And waiting for the market to move closer to you takes control of your finances. That is, if rates are 7% and you are expecting rates in the 4% range, you may have to wait a few years.

Have a strategy when you go into a home loan or refinance and “use” the mortgage to execute your game plan. Mortgages are just tools. And choosing the right tool is very important.

Ask yourself, “Is there a better way to approach a home loan or refinance than just trying to get a ‘magic low rate?’ Naturally, the rate is important, closing costs are too, but let’s try to combine two goals. The more you can accomplish with your refinance, the better, and the better ROI you will get on your closing costs.

For most people, they just target the mortgage rate. So what do the mortgage companies do… give these people low rates? But with PMI…

PMI: Consider this, if your rate is 6.00% and the house payment is $1000. But your PMI is $200 a month, do you still think your rate is 6% if you’re paying $1200 a month? Why aren’t more people avoiding PMI? It is almost always a waste of money. You guessed it. Home loans that are 80/20 or 80/10 or 80/15 have higher rates because they are riskier than individual loans.

And did you know that people who do mortgages make more money on individual loans than on individual loans? 80/20 or 80/15/5 loans?

Or take 95% home loans…these rates are over 20% off. But sometimes people want to keep their money instead of putting it in a house. Maybe they’re self-employed and can get a higher return on this money somewhere else or maybe they can cut that 5% and eliminate all their consumer debt. Every person is different and has different goals and income.

So how do we combine these low rate goals with financial planning? What do “refinancing rules” look like in real life?

Someone calls and says “I want to lower my rate. I want to lower my monthly bills.” Ok great. That’s pretty general. Like most high school boys, they want a nice car and a nice girlfriend. Who doesn’t want this?

But what if we took a broader approach to things and combined your goals for a refinancing rule and added “eliminate consumer debt” to the equation? Which loan would you choose if the goal was to reduce your family’s overall monthly expenses, not just the mortgage?

Just focusing on the mortgage is fine, who doesn’t want a lower house payment? But when we look at the mortgage in the context of overall family expenses, what we’re really doing is improving your overall financial plan. This is what a financial planner really needs to do. And all financial planning begins at the mortgage level. Because when you’re debt-free, you have more money to save, invest, and build for retirement.

And all of this starts at the mortgage level.

What is your current refinancing goal? Perhaps your situation could be, “Hey Mortgage Guy, what loan do you suggest will help me retire at age 55?”

Let’s talk home equity loans: We recently helped a client get out of debt with a home equity loan. They will save over $900/mo. That’s $10,800 a year in their checking accounts. It is not theoretical money. Not the What Would Dave Ramsey Do (WWDR) approach of “pay off your cable and take the difference and put it in a municipal bond so you can earn 1.3% over 10 years” but real money.

Financial planning really starts at the mortgage level.

Home Equity Loans: If you’re going to refinance, at least look at something bigger than the mortgage rate. For example, let’s say your current mortgage is 7% and rates are 5.75%. You would really like to refinance and lower your bills. Let’s say if you took advantage of 5.75%, you would save $100 a month. Hey, that’s progress!

But what if you take some equity out of your home and pay off most or all of your nontax-deductible debt in the process? This would probably save you $500-$700 a month. Then you could take some of the savings and apply it to your principal and pay off a 30-year mortgage in 15 to 20 years. That’s a very important step, and this is where I agree with Dave Ramsey: You have to have a budget because without it you’re going back into debt.

Refinancing to get a low rate is good. The second approach lands you in a completely different financial situation.

I mean, you’re going to have closing costs anyway. Why not opt ​​for a mortgage loan that will advance you financially against your economy? one that will only save you $100.

Some people think that home equity loans are not good. Gurus like Dave Ramsey don’t encourage them. But if the numbers make sense, who’s to argue? Is Dave Ramsey going to pay your bills for you?

Dave teaches some great, time-tested fundamental principles. Most of which I agree with. Budgeting, saving, little debt… but the more I listen to his show, the more I see that his main goal is this: “Get to zero.”

“Don’t owe anyone anything”… which is good. He even throws in some Bible verses. Who could disagree with a simplistic message of getting to zero?

I don’t think you win the financial game by going to zero. I think you get there when you have money. When you have assets And I tend to disagree with anyone who takes a black and white approach to anything. Few things in life are 100% and money is no different. If you called Dave’s show and said, “Hey, I make a lot of money, but my retirement is iffy at best. I only have 30K in retirement and I’m 50.” He’s likely to suggest that you need a bigger budget, maybe cut out some vacations and buy another book of his.

If I were to call and you and I would have no goals of our own, I would probably suggest the things Dave suggests, but I would encourage you to buy investment property or some other growth vehicle. If your IRA is growing at 1-2% and we find some properties that are growing at 3-5-7%, I would even encourage you to put more of your savings into a higher yielding vehicle, like established real estate. No spec stuff. Then, with the right planning and discipline, you could retire with several properties that have equity.

Then, with these assets you could sell or hold them and enjoy passive income during your retirement years. Whichever approach you take, you’ll need to get some points on the board because “getting to zero” isn’t a long-term game plan. Most people need to take the Dave Ramsey PLUS perspective… Take budgeting, saving, the proven fundamentals of getting out of debt, PLUS buying and holding assets and starting businesses, even if you have to go into debt.

Because reaching zero should not be the goal and each mortgage should have a specific purpose to advance financially.