Are you confused about when to refinance your mortgage or how interest rates affect your decisions? In this episode, John, Tommy, and Ben dive into critical financial topics for federal retirees navigating today's housing market. You'll learn about the challenges of refinancing, when it's a good idea, and when you might want to hold off. They also explore discount points, what makes buying a home more difficult now than in the past, and how to prepare for future market changes.
Listen in to discover why homeownership is often a wealth-building tool in America, and why the idea of downsizing in retirement might not be quite what we think. Plus, get insights into recasting a mortgage and how current financial advice compares to that of five years ago.
Listen to the full episode here:
What you will learn:
- What the refinance process is and how difficult it is to go through. (5:20)
- When you should consider a refinance and when you might want to hold off. (9:55)
- What a discount point is. (18:00)
- Whether the current advice for purchasing a home is different than it was 5 years ago. (19:40)
- Why it’s harder to buy a house right now than it was before. (24:00)
- The myth of retirees downsizing in retirement. (30:20)
- The advantages and disadvantages of recasting a mortgage. (37:00)
- The benefit of working with a qualified financial advisor. (41:40)
Ideas worth sharing:
- “It's not always about optimizing every financial decision—it's about focusing on what truly matters in life.” - Mason & Associates
- “Dance to the music that’s being played. Put your best foot forward on everything and position yourself so that as things change, you can take advantage.” - Mason & Associates
- “For most of America, a house is a wealth-building tool because it’s a forced savings account.” - Mason & Associates
Resources from this episode:
- Mason & Associates: LinkedIn
- Tommy Blackburn: LinkedIn
- John Mason: LinkedIn
- Ben Raikes: Website
- FEFP: Mortgages, Home Equity Lines, and Interest Rates (EP24)
- CapCenter
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
John Mason: Welcome to the Federal Employee Financial Planning Podcast. I'm John Mason, president and certified financial planner at Mason & Associates. And today on our podcast, we have myself, Ben Raikes, and Tommy Blackburn.
Folks, if you've been listening, you know we're all three certified financial planners, Ben's an IRS enrolled agent, Tommy Blackburn's a CPA and PFS, one of the most credentialed financial planning shows out there doing podcast content, specifically for federal employees as well. And in today's episode, we're going to be pretty timely.
So we're recording on August 26th. It'll release sometime probably in October, so it's fairly timely, the episode that we're recording today, and we're talking interest rates, we're talking refinances, we're talking housing, and this may be a little bit more of a spirited debate than we normally have, so forgive us if there's a little bit of back and forth going on, we hope you enjoy the debate.
It's the three of us talk about interest rates, housing, refinance, recast, and a slew of other pieces of information. If you like the content, please give us five stars, leave a comment, shoot us an email to MasonFP, like MasonFinancialPlanning @MasonLLC.net. And for the audience, if you don't know this about me, I'm colorblind, so I'm not black and white colorblind, but I'm red green colorblind.
If you're watching this on YouTube, I think all three of us are maybe wearing white shirts today. Maybe one's cream. I can't really tell. Are we all in white shirts?
Tommy Blackburn: Mine’s more like a light yellow.
John Mason:How about you, Ben? I can't tell.
Ben Raikes:This is white. And no, we did not call each other and plan to all look the exact same way. So, yeah, I apologize here.
John Mason: Well, we're all nice and tan. We've all got our light-colored shirts on. So we're looking really good in this episode of the Federal Employee Financial Planning Podcast. Guys, it's been an awesome summer. I know we are, we're really excited to get into end-of-year tax planning, help our clients retire at the end of the year.
We've got some other episodes that just recently released with Social Security. As we talk about this and we talk about interest rates and we talk about refinances, I do want to call out immediately episode 24 with James Anderson from CapCenter. If you haven't listened to that episode, you're going to want to go back and listen to that at the conclusion of this podcast.
So, Ben, let's start with you. You're really excited because there's a big thing happening in your life on Friday.
Ben Raikes:Yep. So I recently refinanced my mortgage. I went through CapCenter. Guys, I went from a 7% interest rate to a 6.125, which is actually a really big deal. If you work out the math, that's around $250 a month that I'm saving just from interest rates going down. So again, 7 to 6.125 refinance with CapCenter. So there were no closing costs. And I find myself a lot of times, in meetings with clients, talking to John and Tommy, just when we're walking around the parking lot or getting lunch and just complaining.
I'm just complaining all the time about woe is me, my interest rate was so high, it was 7, now it's 6.125. It's probably still double or at least triple than what John and Tommy have and I'm wondering, am I being fair here? Are my complaints well-founded, or should I just say, “You know what Ben, you're one of the lucky guys that can afford a house anyway, you should just sit down and shut up.”
John Mason: Well, I think it's certainly self-inflicted damage, right? This was part of your financial planning decision where you chose to sell house A and move into house B. So yes, do I feel a little bad for you? Maybe a little bit, but not so bad. Not so bad because this certainly wasn't forced upon you when you moved into your now what'll probably be a forever home or at least a very long-term home.
So you're refinancing on Friday. You're saving 250 bucks a month. Our listeners can do the math. That's a decent-sized loan that we're dropping from 7 to 6%. Maybe some of our listeners, Ben, have never refinanced before. Maybe you could, and all three of us, for our audience, have refinanced through CapCenter multiple times.
Maybe you could just share, Ben, Tommy, what is the refinance process? How difficult is it? And I do want to pick up on what you said that there's no cost to you. That doesn't mean you're coming to closing on Friday with zero dollars either.
Ben Raikes:Exactly. Yeah, since I'm going through it, let me speak a little bit about that process and maybe Tommy and John, you guys can jump in if there's something that I've missed.
So one, you kind of have to pay attention on your own for when these interest rates drop. I know that John and Tommy and certainly Mike and Ken, we all keep an eye on it. And when rates get lower or they're moving pretty quickly, we like to notify our clients and say, “Hey, rates are dropping. Maybe you should consider refinancing.”
It's not like all of these mortgage companies are just going to be screaming your name and saying, “Hey, that 7% mortgage, I'd like for you to pay me less money now.” That's not going to happen. So number one, this is something that you've got to pay attention to something that you have to be aware of.
Once you find a lender, you say, “Hey, I'd like to refinance.” They'll kind of give you a quick quote and say, “Hey, here's where rates are today. In order to lock you in, we're going to need you to go through a process.” Normally that process is send me every single piece of information about you that I could possibly know.
So that's going to be last two years of pay stubs, last two years of tax returns, what are your current bank account statements, how much do you have in your 401k and IRAs, what current loans do you have, do you have a loan payoff statement, they're going to ask for information, what else am I missing guys? Is that pretty much everything they ask for?
Tommy Blackburn: They asked for a lot. It's funny as I was thinking back, John, in the heyday of refinancing, we were doing it for every like eighth of a point on the way down as we got below 3%. I think I had a file on my computer with all my information ready to go just because I was doing it so often.
I was like, okay, here's everything about me for the past two years. You may have mentioned, Ben, cash. It was interesting as we were talking because I remember at one point giving all the investment statements. But then realizing that they really didn't care, it was more of show me your earnings, show me your tax returns, and show me the amount of cash that you have available.
And as long as that's enough, then they kind of stopped caring about a lot of the other information. But yeah, I think you covered it for the most part. I know, they'll of course reach out and ask you if they need more. If you have a revocable trust involved in the titling, I think that may generate some additional questions, give us those documents. I think that's probably that's most of it.
Ben Raikes:You probably want to let your employer know that you're refinancing because oftentimes the lender will reach out just to confirm your employment. I know Bobby here said that she was getting calls from CapCenter and I said, I know you were this close to just saying Ben Raikes.
I've never heard of that guy. What are you talking about? So you want to let them know. Okay. Yes. Hey, Mr. and Mrs. HR department. Yes. They're calling to confirm this. Once you send them all that information, you lock in your rate. Then normally your closing will be scheduled anywhere between two weeks to 30 days out from that point. You sign a bunch of paperwork. “Hey, here’s the new lender. Here are the payments that I’m gonna go through.” And then your new mortgage will start. As John said, CapCenter does this for free but it doesn't mean that you're not bringing cash to that closing process.
Typically what works out is you have an escrow that you've been building in your current mortgage. So that's the account that you fund monthly on top of your principal and interest that goes to pay for your taxes and your insurance. That escrow account has accumulated a value. When you refinance your current escrow account gets closed out and then you have to bring cash to close to fund a new escrow account.
You also have to pay a little bit of prepaid interest. So, typically the way it works out is, hey, I'm gonna bring $2,500 to closing to fund my new escrow account. And then anywhere between 30 to 60 days after closing on your mortgage, your old escrow account gets sent to you in a check, so it ends up washing out, even though you do have to bring some cash to close.
So again, in my experience with CapCenter and anytime I've refinanced, yes, it's kind of a beast to get all those documents together, but it's a fairly seamless process, and again, it's free. So there's no math that you have to do that says, hey, is this worth it or not? And maybe Tommy or John, you can speak to, hey, what if I have to pay for this refinance? When does it start to make sense for me? And when should I maybe hold off?
John Mason: So real quick summary ‘cause you guys said a lot of good things. The verification of employment, certainly important. Tommy, I loved what you said on only give them what they need. Like I gave them a bank statement and income and a tax return.
And that was it. It's like if they need more, they can ask for it, but I'm going to start off giving them like the most minimal amount of information just because, I don't know if that's just me being like, playing a game or playing a hardball–
Tommy Blackburn: But I think it avoids confusion too. Sometimes the more information you give them, they're more likely to get wrapped around the axle.
John Mason:That's a good point.
Tommy Blackburn:Give them the minimum amount.
John Mason: Now, some of the people listening to this podcast, obviously there's probably a lot of federal employees, maybe there's some clients listening, but maybe that federal employee is married to a self-employed business owner. Well, that certainly complicates things.
So, for instance, Ben's a 10% owner at Mason & Associates. There's a certain amount of underwriting that has to happen for a 10% owner. Which is different when you become a 25% owner, I believe. So understand that if you're a business owner, or you're an owner of a company, or you're self-employed, there could be a difference in underwriting.
We do want both people on the loans whenever we can. So, that's just something to be aware of. The other thing is, like Ben said, if you come to closing with cash, I personally have found every year for 9 years that I've owned my home, guys, that I always have a shortage in my escrow account. I never have the right amount.
I'm always short. I don't know why, but I'm always short, so taxes go up, insurance rates go up, and what ends up happening is some point throughout the year I either get an increase in my mortgage payment or I make a one-time payment to like true up the escrow account. So it may not be a wash, with tax rates going up and home insurance rates going up.
And if you're in a shortfall, you may be coming to closing with a little bit more than you thought and more than you're going to be refunded, but that's not a cost. You're going to have to pay that anyhow. Maybe we're just speeding up the time at which you have to unload that cash. And then typically–go ahead.
Tommy Blackburn: I think is where I didn't thought you were done with kind of the process there as well as jumping in. I just, Ben had mentioned correctly that there's no cost through CapCenter, but it always just raises a question of, well, how are they making money? What's the catch here? I think it's worth, and CapCenter I don't think is the only outfit out there that does this.
It's just one that we work well with and are very familiar with. And in fact, we probably all have them on speed dial because we've worked with them so much. But yeah, John or Ben, if either of y'all want to just touch on maybe that last piece of that process and how CapCenter is, how this is financially beneficial to them when they're not charging you a fee.
John Mason: One of the only negatives that I've heard about CapCenter is if somebody is like a federal employee is very specific that they want their mortgage service provider to be Navy Federal Credit Union, or they want their mortgage service provider to be XYZ company. And it can only be that that company is the one they write the check to each month.
Well, CapCenter is not going to work for you because they're going to generate the loan then they're going to sell it to whoever. Like mine's currently with Bank XYZ. I don't love Bank XYZ. I prefer not to pay Bank XYZ any amount of money, but I'm also not going to argue with a free refinance, so just understand that your loan may get sold, anytime you refinance the origination company, you may make your first payment to them and your second payment to somebody different, and I think maybe your loan can even be sold multiple times, so there is an administrative burden here.
But you'll be okay. You filled out all those federal employee forms. There's a lot of bureaucracy and documentation that we've all come used to over the years so you'll be okay going through this process. The other thing is you're also going to probably skip a payment, which doesn't necessarily save you any money, but it does help offset the fact that you had to show up with money at a closing time. Ben, you mentioned, when should we do this. Should we do it now? What if we have to pay for it? So I think this is a great opportunity to highlight CapCenter.com, which is one of the only, and we're not sponsored by CapCenter.
We don't get paid by CapCenter. CapCenter.com is one of the only places where you can go and get current interest rates without having to enter an email address without having to put in your firstborn child's name and their social security number. So we love CapCenter because it's a great place just to get education on what a refinance could mean to you. So CapCenter.com, hit the refinance tab, and then Ben, to your point, they're going to give you a side-by-side comparison of how much CapCenter charges for things.
And there's certain things that you just can't avoid. There are certain fees that are just, you know, taxes or whatever that we have to pay. closing costs, prepaid interest that we're going to have regardless. But then there's the origination fees, the discount points. And this side-by-side comparison is going to show you the industry norm versus CapCenter, and it's not an insignificant savings.
So with CapCenter, you just refinance every time it drops a quarter point, half a point, as long as you're okay continuing to go through that administrative burden, and you're probably not going to do too much damage to your credit score along the way. If you're having to pay for it, that's a harder calculation because If you think rates are falling, paying 2, 3, 4, 5000 dollars, to just do it again in three months and do it again in six months, you are going to be wasting money and probably not recoup that savings. So the easy button, Ben, is just find a company that will do it for free.
The harder question is how do we try to pick the right time if we're paying for it? And I don't know, a rule of thumb right now, I would say, easily, if it's dropped a point, we should probably move on it. I probably wouldn't move on a quarter, but I definitely move on one.
Ben Raikes:And a little bit that's also going to depend on is this your forever home, right? If this is your forever home and it moves a quarter down and let's say it costs $5,000 in order to refinance that loan, but you know, over the next five years, you're going to save at least $6,000. Okay, well then maybe that makes sense.
If you're going to move out of the home, this is just a starter home and you're only going to be there 36 months, it doesn't make sense to pay $5,000 for a refinance. If it's only going to save you a hundred bucks a month, you're never going to recoup that money. So some of it is, I hundred percent agree with John. Rule of thumb, if it's a point down, it's a complete no-brainer at that point to refinance almost 100% of the time. If you're anywhere between a quarter of a point and a point, then I start to look at, well, what's my timeline? How long am I going to be here? How long is it going to take for me to recoup my money? And then kind of try to base your decision on that.
Tommy Blackburn: I think, to continue advertising for CapCenter, just because we've talked about it for folks if they're curious, looking at their website, it looks like if you live in Maryland, Virginia, North Carolina, South Carolina, Georgia, or Florida, they're an option to you. Those are the states they are licensed to do business.
And if you're not in one of those states, if the property is not in one of those states, you're going to have to go search for either a low-cost provider or see if you can find a company similar to CapCenter out there.
John Mason: Another consideration in a refinance is whether or not you buy these things called discount points, and I'm fairly confident we talked about discount points in episode 24, but the idea behind a discount point is you pay dollars upfront to get a lower interest rate, so if the going interest rate on August 26th is 6.125, you could buy it down to less than six, and it's going to cost you dollars to do that. So that's another question is, should we, you know, maybe with CapCenter, if you're getting the base refinance for free, maybe then you could buy a discount point if you think that's going to be the lowest it goes.
You don't really want to buy discount points if you think the Fed's going to lower rates and mortgage rates are going to come down and all of these things are going to happen and you can refinance for free later on at a lower rate. Buying discount points doesn't make sense. But if you want to take the bet that this is the lowest you'll ever get.
Have at it. Buy a discount point. So it's easier to buy those with CapCenter than it would be to buy those with another company where you're paying for the refinance plus the discount points. That's just another thing that gets added into the calculation, guys. And I think as we continue this conversation on refinances and mortgage rates, if rates today are between six and six and a half, that's still below the long-term historical average.
Certainly higher than when Tommy and I and Ben, we all bought our first homes. How are we advising clients right now who have children who are looking to enter the market? Should they buy their first home today? How are we advising clients who maybe are in their home that they raised their children, but they want to move to a home that's going to serve them better going forward?
Is the current housing environment changing the advice and are the mortgage rates preventing us from making a change?
Ben Raikes:Go ahead, Tommy.
Tommy Blackburn: There's a lot to unpack there. The advice I think is probably changing and how we structure the transaction if we move forward with it. And what I mean there is past five, five years ago, or not even that long ago, when we were in this very low interest rate environment, then maybe we’ll get some work back to, probably unlikely we'll ever get that low again, but in a lower rate environment, I think we all agreed we were in no rush generally to pay a mortgage off. So that could be, “Hey, go buy that dream house. Go buy your first house. Get the 30-year mortgage and we're going to ride this rate forever,” because it's almost free money at that point, and with those interest rates, whereas now I think one big change is, yeah, actually, client, we want to look at paying this thing down pretty quickly when we're at 6 or 7%.
That's a big difference from the 3 to 4% we may have known in the past. So I think that piece is changing. As far as, there's just a lifestyle part to that question that's not necessarily how you structure the transaction, part of the advice, it's what's important here.
So for clients who are ready for that next home, I think usually provided their plan is in good shape, which if they're a client of ours is almost guaranteed that's going to be the case. We're not necessarily always worried about hitting the optimized financial button. It's what's important in life.
So let's go get that house. Let's realize, yeah, we're buying it probably at an elevated, market price, but there's not many homes on the market. So who knows? So put that to the side and let's just do what's important and what you're going to get enjoyment out of, assuming we've looked at what are any trade-offs here.
I don't know if we'll get into it, but John and I recently were talking to a client about a second home, a question that they had and essentially, it was you guys can afford to do it. It's going to take a substantial amount of your resources if something is going to give somewhere else in your plan.
So if this enjoyment of this house is huge to you, then let's do it provided you're okay, maybe not globetrotting as much because more of your resources are going to go here. For clients, so first home buyers, that's a little tougher, I think, in a sense of if we have a family, Ben kind of alluded to it as well, if this is going to be our long-term home, probably feel pretty comfortable. Let's do it. Let's figure out how to make it work. Let's figure out what our constraints are. Maybe you're not getting the house you thought you were going to get, but we can get still something we're pretty happy with. But there's probably some consideration that needs to be had for maybe you should just rent and save and wait until you know where you're going to settle and be for a little while and you're in a better financial position.
Or maybe, John, as you mentioned before this call, you should be looking at a condo. I mean, there's just a little bit more flexible thoughts, I think, that need to be had there depending on where you are in life.
John Mason: I agree, Tommy. And, there's so much to home ownership and I think I've mentioned on this podcast many times, I enjoy watching some Dave Ramsey clips from time to time.
And the other day I saw one of he was pounding his chest, and this is not hating on Dave, but he was like, “I told you, property values aren't gonna go down, I told you.” And it's well, yeah, in the short term he was right and the long term will be to be determined, but home values going up is not this predetermined thing that will always happen.
So the rush to buy a home, worried that you will be losing out on some appreciation that is guaranteed, is not necessarily a great assumption. So one, we have this fundamental issue with homes may not always go up in value. Yes, we know there's an inventory problem. Yes, we know there's a shortage in housing, but things tend to work out over the long term.
And we have seen real estate prices go down in the past and that could very well happen again, even if we don't think it's likely, it could happen. The other thing nobody talks about with home ownership is how expensive it is to own a home, right? So if we buy a home and we need a roof and HVAC, new flooring and bathrooms and maintenance and yard and flowers and mulch and taxes and insurance and all of these things.
Or a sunk cost that for whatever reason when rates were low, we just didn't think about that. Well, now with rates being higher, interest is a sunk cost as well. So I do think it's harder and I do think that a long-term wealth-building tool could be a house, but it could also be renting and saving all of those extra costs into a 401k or Roth IRA or TSP.
Now, that second time our clients who are selling their home and buying a new home, it's a much easier conversation for them. Yes, you're going to pay more than you thought, or maybe we can't pay cash for the next one, but your life on this planet, because we work with retirees, is shorter than it was when you were 20 years old.
We've got 20 or 30 years of good retirement life expectancy. Are we really going to let two percentage points on a mortgage rate determine whether or not you can see your grandkids weekly? Probably not. We're going to pull a lever. We're going to reduce our travel. We're going to do whatever we need to do so that you can get into a home that's going to serve you better.
And what we always do then with our clients is support, empower, educate, motivate, right? So if they're going to buy this house and rates are two ticks higher than what they were before, we can show them what that means in their plan, and I can almost guarantee you. If somebody's putting value on being in a certain location for their health or family or what have you, that they're going to be happy to pull those levers that allow them to do that.
Ben Raikes:You're gonna make it work. I think you guys hit everything. I won't repeat too much of what you said other than 100% it's what's important to you. It's what you value. And I think particularly for those younger folks that are looking at buying their first home, again, echoing what you all are saying, time horizon, time horizon, time horizon, right? If you're someone who's just out of college and you're starting your first job in Northern Virginia and you say, “Hey, I'm going to work here two or three years.” Probably doesn't make sense to buy a house. Who knows what pricing fluctuation is going to be in that short time period. You're going to pay probably a real estate agent twice to buy and sell the home.
So that's money off the appreciation of your home. If you're going to be somewhere long term, it becomes a lot easier. If you've already have an established family and you're going to be here 10, 15, 20 plus years, it's a lot easier to pull that trigger than it is, “Hey, I'm only going to be here two or three years.”
Tommy Blackburn: It's interesting. As we talk about it, I think it's a lot of lifestyle choice that you're hearing from us is more so than like how we feel about it from an investment. And we definitely think about what does it do to your plan. How does resources work around this? How are we efficient about it?
But I don't hear any of us talk about necessarily like vaguely there's some wealth-building here, but it's like your house is, it's not a cash flow asset, right? So yes, I guess you could say it's an investment, but it's hard to realize the return on that investment ‘cause you've either got to sell your house or you have to get like a home equity line of credit, which means you're now taking on debt, paying more interest rate to get that cash flow.
So it's not that it can't be an investment, but it's one that's like really hard to actually realize that appreciation beneficially to you. So it's just more of a lifestyle. I was also thinking part of this, which would kind of maybe bring it full circle, is you've got Ben and others who have bought at a high rate, but through companies like CapCenter, if rates drop, you now have an opportunity.
So it really, I guess to me, it's so much in life. Dance to the music that's being played, think, put your best foot forward on everything, and position yourself so that as things change, you can take advantage. So Ben now and others who were at the peak of the mortgage rates are now able to refi on the way down.
So there's that strategy. We may talk about recast as well, but it all just kind of comes back to just leave yourself flexibility so that you can take advantage when opportunities present themselves.
John Mason: I don't remember where we heard it, or if it's just like a standard thing That we talk about at Mason & Associates and in the financial planning industry, but an investment is something that you can sell whenever you want to, right?
You can buy it and you can sell it whenever you want to. A house doesn't really fit that criteria because if you sell it, you have nowhere to live. So I love that my house went from A to B and that growth has been 50 to 70%. Doesn't really matter to me other than my taxes and insurance have now gone up.
So the house is costing more than it did a few years ago and I can't sell it. And if I wanted to move, I'm just buying something that's more expensive as well. So I'm not sure how beneficial this is. I also, as maybe a finance nerd, have documented quite a bit of the money that I put into that house.
And I can tell you that, you know, when you do upkeep, the appreciation just keeps up with the upkeep dollars, you're probably not overly surpassing it. So I don't think it qualifies as an investment. For most of America, a house is a wealth-building tool because it's a forced savings account.
If we just really want to be honest about what that is, people have a hard time-saving in TSP and 401k, and Roth IRA. But when you have an amortized mortgage payment that tells you must put X amount of principal aside each month so that you continue to live in your home where you raise your family, well, it's a forced savings account.
It doesn't mean it's a good one or a bad one. It's just a forced savings account. And at the end of 15 or 30 years, you'll have some amount of equity that you've saved. So it's not an investment. It can be a forced savings account, which for some is a wealth-building tool. But we would argue there's probably better ones out there.
So we talked about a lot–go ahead, Ben.
Ben Raikes:If we have a one, just a quick second. I kind of wanted to go back on what Tommy was saying about talking about houses as investments, and there's no real easy way to access the capital in your house that's accumulated over time and the equity and price appreciation that you have.
I wanted to talk just for a minute about what I think is the myth of retirees downsizing in retirement. The typical scenario is, “Hey, maybe I've lived out in the suburbs. I've raised my kids. I've paid off this house over 30 years, and now I've got this paid off house and I'm an empty nester. The kids are out of the house and I don't need all this square footage. I want to go somewhere smaller. Maybe that's a little bit closer to the city where things are easy and more accessible.” And I don't know how many times I've heard this conversation play out. And then I say, well, what kind of price range are you looking for to find that nice house near the city that's around all the things that you want it to be, and it's a thousand less square feet than what you have now. They say, “Oh, probably around the 450,000 to 550,000-dollar range.” And I say, “Okay, Mr. and Mrs. Client, well, what's your house worth today?” “Probably around 500,000.” So I say, “Okay, so when you say downsize, you are literally just downsizing the size. You are not downsizing the overall cost.” And I just think that's important for people to hear is I think a lot of people have those plans. “We'll sell this house. We'll make a bunch of money. We'll move somewhere that's closer to where we want to be.” Usually, that's a one-to-one transaction.
Meaning you're not having hundreds of thousands of dollars left over in cash because you sold your home that you initially bought and now you've downsized and move somewhere closer to the city. I just think that's important for people to understand.
John Mason: I don't know that I've ever actually seen a client downsizing quality, and I don't mind sharing this with our audience, but like you start to get used to as a human, your income and the quality of life and the things that you can afford in the context of your financial plan.
So if that's granite countertops, you get used to granite countertops. If it's a Ford Expedition, it's a Ford Expedition. If it's a brand new GMC Sierra 1500, it's a brand new GMC Sierra 1500 with a 6.2 liter V eight that takes premium fuel.
Ben Raikes:You don't need it in the future, right? You got used to this.
John Mason:Right? You got used to it, which means you're probably always going to have that quality of life or those quality of things. So the downsizing and square footage is one thing, you're probably not downsizing and quality or price. And I'll share too just kind of a fun story.
And it's nothing against the Nissan Versa. Like I really want a Nissan Versa. I really want that as a third car. I want a five-speed manual, 110 horsepower, whatever it is to buzz around town ‘cause I don't want to drive my truck every day. And at the same time, it's like I don't know that I could physically be okay with that entry-level of a vehicle.
I don't know that I could. In my mind, I say that I want the cheapest possible third car that I can get. I'd like to have that. But at the same time, it's probably not realistic to think that's a purchase that would make me feel happy. Or it's a purchase I would immediately regret.
It's a purchase I'd immediately regret when it doesn't have CarPlay, maybe it still has roll-up windows, I don't even know what's included on the base-level Versa these days, but in my mind, I want to make the prudent financial decision to buy the cheapest possible and it's the cheapest car in America.
That seems like a reasonable car to buy for a third car that you arguably don't need, but that's probably not where we're going. So sorry for the tension.
Tommy Blackburn: That's a good point. Drives it home though. Yeah, you exactly read my mind. And I've seen it too. There's a whole downsizing thing, even with family members and clients, the cars is so true too.
It's like not only, or maybe you're going to shrink the square footage, but you're going to still have all of the luxuries in it. So we're talking about even more expensive per square foot probably when we downsize. Same thing on the cars. I've seen it where they, yeah, we had the Suburban, we had the luxury large vehicle when we had the kids and we were hauling everything, but you know what? They're pretty nice. And I got used to that. So even when the kids aren't here, I'm still going to drive that vehicle.
Ben Raikes:Got the expedition for two people.
Tommy Blackburn: Yeah.
John Mason: Yeah. Well, and we become a lot more particular, right? So I can, the audience knows we own an RV. Sarah and I have an RV. We're going to upgrade our RV.
And we've lived with this one for over three years and we know exactly what we like and exactly what we don't like. We just recently spent five weeks on the road. We can tell you that the fridge didn't work the way we wanted it to, that the kitchen was too small. I have a soy allergy. So cooking is very important to us to be able to do that in the camper.
It's taken us three years to find the layout or make a decision on what that next layout is going to be. So as you start to live life, you go from life being super easy, we just wake up and play all day, to you start needing things a certain way, or you start having these desires where you don't want to make sacrifices or concessions.
And I don't know when that peaks, but we talk all the time, guys, with clients. It's like if you're building a home or buying a new home, get it right immediately. Build the screened-in porch, do all the things, put in the—whatever it needs to be. Get it the way you want it to get because you only have this finite period of time to enjoy it.
So not only are we used to it, not only do we not want to like arguably downgrade, we're also not willing to make concessions anymore. So we are very stubborn as humans because all of these things happen at the same time.
Tommy Blackburn: I think as a fun aside, it reminds me of our conversation with the client building that second home, and John and I, and Ben, I know you would have the same thoughts on it, was whatever number the builder gave you, you need to add 20 or 30%.
Like you think it's going to be like, well, did you ask for your grade of build or is that the base bill? Because we bet if you push them and you said, “No, I really like granite countertops. I like high-end things.” That price is going up from what they quoted you.
Ben Raikes:The price is going up and the time frame for completion should also add another 50% as well, right?
John Mason: No doubt, no doubt. So I guess a couple one other thing, maybe two other things, the recast, maybe we can just touch on that really quickly. So with rates dropping a recast isn't necessarily applicable because you would rather refinance to a lower rate than keep your existing mortgage. So the idea of a recast would be, let's say Ben refinances down to 6.25, 6.125, inherits money a year from now. He has an option to put $100,000 down or some lump sum payment on his mortgage and ask his mortgage service provider to recalculate how much he has to pay them each month. The loan will still be paid off over 30 years, the loan will still be paid off on schedule, but the monthly principal and interest payment will be reduced by the principal added.
That's different than if Ben just sent in a $100,000 check. If Ben sends in a $100,000 check, the mortgage balance drops, the payment stays the same, and the house is paid off quicker. So you do win from a lump sum, but you don't win monthly because you still have the same monthly required payments. So it's a question of do we want the long-term interest savings of the lump, or do we want the immediate cash flow savings, which will still save you interest over the life of the loan, but we have to look and say what's better for your financial plan.
Next one, maybe Tommy, you want to hit on this really quick, unless you want to talk about the recast.
Tommy Blackburn: Yeah, I was just going to say, I know we're trying to wrap this up as we go through time on the recast. It just as an aside, I had this as a real-life example very recently with a client.
Their mortgage, they've locked it in probably at 6% as it was going up. so they're still below current market rate. But we did this recast. They sold, they relocated when they sold the house, they had all this cash. And so again, instead of investing it, it was, “Hey, at 6%, I think we're better off trying to attack this mortgage at this point.”
And that was huge. That's easily saved them 4 or $500 a month. And in the back of my mind though, and they're in Florida, so I'm keeping an eye on this. If rates drop down below that six, we're also going to refi at no cost. So either way, they've won under this. And so it's, again, just thinking about what are my options.
How do I make the most of this situation? So I agree with you, recast. Right now you're probably thinking more refinance, but keep recast in the back of your mind, depending on your situation.
John Mason: So life’s changing in 2026.the Trump Tax Code, TCJA 2017, I think is what it was, basically, for all intent and purposes, eliminated itemized deductions for a good bit of America.
That changed when house prices increased and debt limit increased, like personal debt on a mortgage, interest went up. Now all of sudden you can maybe itemize. The standard deduction is like $26,000, so it takes a long time. For folks to be able to itemize. Specifically, interest rates were low, state and local income tax was capped at 10,000 grand. Maybe Ben was still itemizing with his 7% mortgage.
I guess the point that I'm trying to get to, guys, is if the tax law reverts back to the old, then all of a sudden the SALT limit goes away, state and local income tax. Maybe all the, and the standard deduction comes back down to like 12 or 14k, married filing jointly. Your 6% interest rate is now all of a sudden deductible where it wasn't before.
So your true cost of ownership is not 6%. It's 6% less your marginal tax rate or less however much you're saving from a tax benefit. So maybe your 6 is actually 4.5 or 5%. So something to keep in the back of our mind. I'm not sure that we want to revert back to that old tax code, but for those of you like Ben who is a little upset that they don't have a 2% mortgage like me, understand that in the future, your rate may not be, understand that your mortgage may not be as bad as you think it is, depending on how tax law changes over the next year or so.
Ben Raikes:And if you do have that 2% mortgage, you don't have to itemize anyway because you're essentially paying zero interest. So you don't have to worry about it.
Tommy Blackburn: And you're earning more on your cash, so you might as well just ride that mortgage as long as you can. Ben, what is the saying as we give you our time? Comparison is the thief of joy.
Ben Raikes:Comparison is the thief of joy. I try to remind myself of that when I'm thinking about this 7%, but I think we're all having fun with each other here, but John really had a good point at the beginning. It's, “Hey, man, maybe I feel a little bit bad for you, Ben, at 7% right now, but no one was twisting your arm and telling you that you are forced to buy this house. This is something that you wanted to do.” And obviously, I know that it worked within my financial plan. And maybe as we're wrapping up, I think that might be a good note to leave on is it's just interest rates might be 2%. They might be 7%. They might be lower than two. They might be higher than seven in the future.
Working with a qualified professional, a financial planner that can say, “Here's how this house and this cost fits within your total financial plan.” Yes, you can do it. No, you can't do it. Or maybe there's a gray area that says, yes, you can do it, but vacations are going to look a little bit different, or saving for your kids’ 529 is going to be a little bit different. Having those conversations is incredibly valuable than just rushing to buy a house because interest rates are going to be whatever they're going to be in the future. So I think having that conversation is incredibly, incredibly valuable.
John Mason: What do you think, Tommy? Any closing thoughts, action items for the audience?
Tommy Blackburn: I think from an action item, I mean, Ben, we've all done a really good job here. I think it's just step back and a lot of times, particularly with a home, just realize it's so much of a lifestyle choice. Control what you can control. So you make the decision of whether you're going to buy a home or not.
That's within your control and then optimize around it as much as you can. Don't, I don't know. I mean, we have such a different perspective and I realize our situations are unique compared to, you know, everybody's got their own unique financial situation. So I try to keep that in mind, but you probably don't hear from us, we don't think about our homes as so much as an investment. It really just comes back to this was a lifestyle choice and it worked out financially. I think it's working out for us financially compared to what the market has done. That's just not how we view it. I know I view my investments completely separate. Like the home just doesn't even come into my thoughts when I think about my investments. That's a complete lifestyle choice.
John Mason: The only reason I enjoy seeing my home value goes up is because it makes me feel better about the money I continue to pile into it , right? At the end of the day, at the end of the day, it's well, maybe I didn't completely lose my backside doing those things.
There is enjoyment in doing the home improvements, don't get me wrong, and the house is certainly better than it was 2, 3, 5. This is your son's home, right? You get to watch your son enjoy and grow up here. So yeah, it's all lifestyle. So it makes me feel better that it's not a negative. The other thing we'll say, kind of my closing thought, is make sure you go back and listen to episode 24 with James Anderson from CapCenter.
Please do all the things like subscribe, share, show your love for us. Thank you so much. And remember that we maybe are a little bit different than some of the media financial planners and that we actually work with clients every day doing financial planning advice, serving clients every single day, and we do this second.
Our thought is not to tell you or not to advise you to stop going to Starbucks. It's not to tell you what you can necessarily, or can't, or should spend your money on. But what we are able to do for our clients is show them how much money they need to save to get to retirement. So as you think about your budget and you think about what's important to you, the non-negotiable is how much do I need to save every year.
And as long as you're hitting your savings goal, however you choose to spend your arguably discretionary income is up to you, right? Whether it's a third car, a second home, upgrading your house, building a home gym, more vacations. It's hard to wrap your mind around spending excessively or spending on things that are not necessary.
I have to work on this. I know Tommy and Ben, you do as well. And I have to physically write it down. Like, how much did I save this year? And then it makes me feel better that I upgraded the windows. I had to like physically prove to myself that I did it. So hit your savings goals, manage from the top down, write down, hit those savings goals, and the rest takes care of itself.
Thank you for being here with us on the Federal Employee Financial Planning Podcast. We hope you enjoyed this episode where we talked interest rates, mortgages, refinance, recast, and more. Again, if you like what we're doing for you, please do all the things for us, like subscribe, share, and we will see you right here next time on the Federal Employee Financial Planning Podcast.
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