7/27/2019 RefiNerd.com - Make Proper Decisions - Bill Hills, CMPS®

http://slidepdf.com/reader/full/refinerdcom-make-proper-decisions-bill-hills-cmps 1/3 ©2013BillHills,CMPS®|LuxuryMortgageBanker|BillHills.com

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®

http://slidepdf.com/reader/full/refinerdcom-make-proper-decisions-bill-hills-cmps 2/3 ©2013BillHills,CMPS®|LuxuryMortgageBanker|BillHills.com

ScreenshotoftheNetWorthAnalysisforRefinancing (John)

MakeWell-InformedFinancialDecisions.

7/27/2019 RefiNerd.com - Make Proper Decisions - Bill Hills, CMPS®

http://slidepdf.com/reader/full/refinerdcom-make-proper-decisions-bill-hills-cmps 3/3 ©2013BillHills,CMPS®|LuxuryMortgageBanker|BillHills.com

ScreenshotoftheNetWorthAnalysisforRefinancing (Mary)

MakeWell-InformedFinancialDecisions.