During a regular planning conversation, the client ran their mortgage scenario by their Advisor and asked for advice on potential options. Here are the details:
- Total monthly payments of 1st and 2nd mortgage (different remaining terms): $3,645.37
- Total monthly payment of potential new refinanced 30-year mortgage: $3,348.13
The client was about to refinance and combine the two mortgages into one since the rate on their current second mortgage was around 7% (the remaining term was less than 12 years). The out-of-pocket costs to do the refinance were just over $11,000. The client wanted to know if this would be a smart decision.
This Advisor turned to a resource, Matt Gallagher, who is not just a rate and term mortgage consultant, but someone who truly thinks about planning vs. selling a new mortgage.
Matt did an analysis and provided the Advisor with the following details, which were very different when you looked at the total cost vs. the monthly payments:
- Total cost of client to refinance and have 360 payments @ $3,348.13 = $1,205,326
- Total cost of client continuing to pay their remaining two mortgages to term = $1,033,916
In addition to the extra $171,410 the client would pay over the term of the refinanced loan, there was also the upfront cost of $11,817, which means it would have cost the client $183,227 more over the length of the new mortgage even though the monthly payment was $297.24 less.
Thanks to Matt’s analysis and the Advisor’s careful explanation of it, the client decided not to refinance, but instead increased the monthly payment on the 2nd mortgage with the higher rate, in order to pay it off sooner. In this situation, the client’s main goal was saving money overall (if a client’s goal was to reduce monthly payments then this might have led to a different outcome).
Ultimately, taking a planning-centric approach helped the Advisor prevent the client from taking a potential $183,227 cost to their long-term wealth. Instead, they will be able to invest that money over the years to come and, if history is any guide, see it grow.
This is just one more area where you can provide comprehensive advice that can help set you apart from other, more investment-focused Advisors.