Live from the headquarters of Ramsey Solutions, broadcasting from the Dollars Car Rental Studios, it's the Dave Ramsey Show where DataStore Cash is king and the paid off mortgage has taken the place of the BMW. As the status symbol of choice, I'm Dave Ramsey, Chris Hogan Ramsey personality is my co-host here on the air this this day on the Dave Ramsey Show, Open phones if you want to talk triple eight eight two five five two two five. That's Triple eight eight two five five two two five.
Joseph is on the line and Joseph in Michigan is going to start this hour off. Hi, Joseph. How are you?
I'm focused on happiness. Dave, how are you doing? Sounds like Chris Hogan fan to me. What's up?
So I got a car that I was trying to sell. It's brand new from last year, and I got a dealer willing to pay it off for me, and I just didn't know if I should try to sell it private party and make a little bit more on it or if I should just get rid of it.
How much is it? It's twenty one. Twenty one thousand. What is. I think it's worth like it's a Subaru gastrique. OK, why can't you sell it?
Previously on McMorrow. I could I just a friend recommended this person and I was like, well, we're trying to sell it because, you know, we're Gizelle intense.
And so what is that? What are they offering you? They're offering me twenty one. And what could you sell it? Private sell for, I think twenty four. And how long will it take you to make three thousand dollars.
I'm not sure this however long it's on the market, I guess. Yeah. OK, I mean, you have any indication that the cars, something that can be so quickly or is it going to sit on the set on their. I mean, I think that it could go pretty quick. OK, or I don't know if I should try another dealership first. Now they're all going to be about the same. I mean, they're not going to they're in the business of making money on the car.
They're going to make the three grand.
Joseph, what other debt do you have outside of this car?
Just another vehicle that we owe 9000 on.
OK, what's your household income? 60, you mean?
OK, all right. So once we clean up this vehicle situation, we're not going backwards, right?
Oh, absolutely not. OK. All right. Because you got car itis, it sounds like. Oh, for sure. You've got to cure that bad boy. But listen, if you can make another three to four grand, why wouldn't you do it?
That's why I call them that. You guys make my decision for me. No, no, no. We want you to make the decision. We're just trying to teach you. The thing is, if it takes a month to sell it and you make an extra 3000 dollars, that's like making three thousand dollars a month.
Yes, that makes a lot of sense and, you know, but I think what's happening is, is you're just like you want the relief bill, right?
And you know, you're OK. So what if it hurts? I'm going to rip the Band-Aid off. And, you know, you can always get the dealer will buy it any time. So you could try for a month and then drop it on the dealer if you wanted to. Call us back and let us know if a month from now you made an extra three grand or if you ended up having to sell it to the dealer after all. They will do all right.
I appreciate it. Thanks, man. That's a good way to thinking about a date. I mean, you're right. The deal is going to give you a dollar amount. They're going to honor it for 30 days, give it a month, slap a sign and take it somewhere in a high traffic area and get to see what happens.
You know, get it on Craigslist. Don't try to trade or whatever. It is the same thing. What's called trader dotcom. Right. And, you know, car guru, whatever it is, you're going to post the thing. You posted a bunch of places and give it a run because that's three grand he could use toward the next.
That's not a bad part time job to make three grand. No, people don't think about it that way. Yeah, yeah. No, it's.
Yeah, but and if that dealer won't honor it, somebody they're going to all be they buy cars. That's right. Wholesales what they do. So and right now there's a bit of a shortage on cars.
A car car market's heated up, believe it or not, during covid and a lot of new cars are.
Well, there's a shortage of inventory because the factories have been shut down and then people got bored, went about cars. And so these dealers are sitting with low inventory in some cases.
And so some of some of these vehicles are going over on a new car lot, going over sticker because there's a shortage. OK, so that's going to pull the U.S. market up as well. Big time. So, you know, the new market supports the U.S. market in that regard. So we'll see.
I mean, I just but, you know, people it's weird. Houses are selling at record rates. Cars are selling at record rates, boats.
You can't find a boat. I talk to my boat guy today, he said in one month we made more money than we did three years ago in a year, how?
Well, because everybody goes I can go on the lake and not get covid and I don't have to wear mascara is out there chasing me around with a mask and social distancing and bitching and whining about everything I can go play on the water. And and it's like like feels like normal again. Right. You know, I'm not crammed up in amongst a bunch of fear porn people and all this stuff. And so, you know, and sailboats are selling like crazy.
Anything where people can get out and have a sense of normalcy. Right. Is going crazy.
No, it is golf. Golf. You can't get near. You can't get it. You can't get on a course. That's a good point. All right. So this is all happening while businesses are closed and things are shut down. OK, we got people buying homes, buying cars, buying boats, but they're not working. I see a storm coming here.
Do you think people are buying stuff they can't afford? Absolutely. You don't think you think that's unemployed people aren't doing that?
Oh, no, no. I mean, I think you got we had people that were unemployed make it more off work than they were working. Yeah. Until last week. Until last week. That's exactly right. And now with that shut off now what we're about to see in the next 45 to 60 days, I don't think I don't think those people living on unemployment are the ones I buy.
But no, there's most of the time. Right? There's no way. But yeah, but there are just certain segments of the economy that have gone bananas. Yes. So you need to just kind of be aware of that if you're on a car.
Right. You know, some kind of think about what really is just in Houston, Texas. Hi, Justin. How are you?
Hi, Dave. Doing good. How are you? Better than I deserve. What's up? Hey, I'm just hoping that I could get some Uncle Dave wisdom from you. My wife and I, we are in baby steps six and are working on trying to pay off our house. Good with the with the Colbert situation, everything going on. I work in oil and gas and, you know, things have been really kind of a roller coaster ride the last few months.
The company I work for, they had to lay off about a third of the workforce of the workforce. And I'm still there. But they're having people do involuntary furlough weeks and kind of going on and off. So it's just kind of dicey at the moment. Yes, it is. I'm wondering if I'm wondering if it would be a good idea to look into refinancing our house right now, because we have a couple of friends that have been buying houses and the interest rates they've been getting have been pretty, pretty low.
And I'm wondering if maybe just kind of as a precaution, I guess it might be good to lower that monthly payment down a little bit while still kind of working towards our our goal of getting it paid off. I think we can have it paid off in three, maybe four years with the rate that we're going.
If you can save enough on interest rate to justify the closing costs before you get it paid off, you would refinance. I would not refinance it and lower the payment. I would lower the term. And that's where payments are. That's exactly right. Not I would not do it in an effort to feel better about your situation. You need to do that. Just quit an extra on and pile up some more money in your emergency fund. But I'd do that before I refinance in order to get a lower payment to feel better.
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Chris, our question for the day.
Sure, Dave. Today's question comes from Chris in Nebraska. He visits Dave Ramsey dot com, and he asks this, I have a mutual fund account with eleven thousand dollars in it. That is not a retirement account. My wife has a retirement account through her job as a teacher, but I don't have one at all. I'm wondering if we should cash out the 11000 in the investment account to put towards our baby. Step two. Oh, Mr. Ramsey, I would tell Chris this is designated as non retirement.
He absolutely could cash that out to use it to attack debt and continue to stay focused and working his baby steps. And then once he gets out of debt, build up that emergency fund and then start investing.
Chris, what we've discovered is that the shortest distance between you and wealth is to get control of your largest wealth building tool, which is not your eleven thousand dollar mutual fund.
It is your income. That's right. And when your income is all going out the door to other people, here's a mathematical fact for you. You don't have the money anymore. It all went out the door to other people.
And so as soon as you can get clear of debt, that is the shortest distance between you and wealth and shorter than investing heavily in mutual funds and mutual funds get you out of debt. That doesn't happen.
The number of times we found that in our millionaire study was almost zero. Yeah. And there were times we found someone said, I'm going to borrow on my house, put the money in mutual funds, or I'm not going to pay off my house and we'll put the money in mutual funds in order to build wealth and stay in debt.
The number of times we found that in the millionaire study was almost zero, right?
Yeah, it's just it's it's about math, Chris, but it's also about being intentional and so but definitely take care of that. Liquidate that debt on that debt. But again, have that mindset getting control of your money. And I want you to hop over into Ramsey. Plus, we'll tell you about that here in a little bit. But it's a great opportunity for you to have community as well as tools in tracking.
Well, you're right, Chris. A lot of people are saying never again after coming out of covid or sitting in the middle of covered or having watched other people go through go.
But never again am I going to be broke, never began. Am I going to be in debt. Never again am I going to be in a situation where I don't have any pain or I don't have any savings to take care of my family. I've been there. It is a scary place to be and you don't want to be there. And if you've been there, you know what I'm talking about.
And we have the right plan, the right tools and the right teaching to where you never again have to be here. Ramsey Plus gives you all of that.
It's our brand new all access membership and you can try it for free. A free trial starting today. Here's how it works.
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So you can start this and do the next right thing for your money. It is your choice to start a free trial.
Ramsey Plus today, text trial to thirty three seven eight nine. That's trial to thirty three seven eighty nine. Jake is with us in Eau Claire, Wisconsin. Hi, Jake.
How are you. Good day. Thanks for having me. Sure. What's up? Hey, we just discovered a program recently and my wife and I have different opinions on baby steps. One baby step two, we when we bought our new house, we kept their old one and we decided to rent it out. We've been renting it out for now for about four years and we have about 100000 on our primary residence. We owe about 40000 on a rental unit.
And I would like to sell it and be free and clear. But we've we've had pretty good luck renting it for the last four years.
So you have a hundred thousand dollars more are more in equity on the rental. No. OK, what's the rental worth? Oh, it's worth about 110. OK, so you get 70 grand out of it, minus some expenses, so maybe 60 grand and you would apply that towards your one hundred thousand dollar mortgage, correct.
We also have fifty thousand dollars saved in our bank account, and that would make you 100 percent debt free house and cars and everything.
Correct. We have no other debts other than the two mortgages.
OK, do you have an emergency fund? Well, 50000 was part of the merchants for probably 20000 dollars in emergency fund and then 30000.
So, yeah, you pay off the house and still be sitting there with a pretty decent sized emergency fund. So here's the way that the two of you can discuss it and talk it through. What's your household income? About one hundred and ten thousand a year. OK, so you can kind of map it out one way and say, all right, we're going to keep the mortgage and we're going to keep the rental and we're going to get them the 50000 down to in either case, we're going to get the 50000 dollars down to an emergency fund and use it in the baby steps.
OK, so we're going to pay down on the mortgage or pay down on the rental. One of the two.
OK, OK. And then you map that out and say with 110000, how fast can we pay off 140000. Minus 30 of the 50 or 110000 dollars making 110. How fast can I pay off 110 and have both properties free and clear? And am I willing to be on beans and rice to pull that off for that period of time? So let's call that for years, OK? I'm making up a number, but y'all look at it, yeah, it's about five, but it's probably, yeah.
Somewhere in that range. All right. And so or we can be debt free in a month. Mm hmm. And we would use all of those payments we don't have anymore in order to build wealth. Now, a good way to look at that part of the discussion would be to say, let's pretend our house was paid for and we didn't have our homeless paid for and we didn't have a rental. Would we take out a one hundred thousand dollar mortgage on our home to buy a rental on our paid for?
It's the same discussion, isn't it? Yeah, I'm just reverse engineering it, but it makes you feel it with your heart, not just your head.
And you might pose that question to your wife and just say, if our house is paid for and we didn't have a rental, since you like the rental, would you borrow on our house are paid for home in order to buy a rental? Because effectively that's what we're doing if we keep the rental right.
And she wants to keep it right. Jake.
Yeah, the reason the reason she's given me is because she didn't get much for her retirement and past employers. And she wants to keep it long term as a potential, you know, retirement plan. Yeah, but now it's like we're putting 15 percent of our retirement worth. She's 33. I'm 30. We have in my mind, we still have time to.
You're going to be well, you're going to be multi millionaire. Plenty of time either. Either answer to this question. You're going to be multimillionaires. You'll stay on task. So she's OK on that.
But the question is, do you know really what the whole thing boils down to is what as you talk this through, what do the two of you come to believe is the shortest path to wealth?
The paid for house and no rental and then save up like crazy by another run with cash and continue to invest, which is what I have done, or we're going to take five years and clean up these two mortgages and then we're going to go do that with two or the paid for or paid for a house and an income.
We're going to go use with all of that cash flow to buy more rentals and build up wealth. Agreed. So which of those against you, they're the fastest and with the least risk and with the most peace for me.
And I love real estate. I got a bunch of it, but for me, I'm selling that rental in about 30 seconds.
Yeah, yeah, yeah. Me too. And that's why I feel like the risk the big thing for me is risk and go down that path where we sell that apartment, become free and clear and save up for the next one to me makes sense. But I hope I can convince her that, well, you just play this back.
She's not wrong in her having those feelings. Right. But the question is just, you know, ultimately you have the same goal and the same goal is her. Hirsche Our retirement statement is the goal is build wealth.
Right. And that's the goal. So the only argument is not what we're what the goal is. The only argument is which path, which is the fastest. That's right. Which path the most efficient. Go the short when Jake from State Farm. Oh, no, no. Jake's a good guy. No, I know. I'm just pointing out this is the Dave Ramsey Show. My co-host today on The Dave Ramsey Show, Ramsey personality Kris Hogan in the lobby of Ramsey Solutions on the debt free stage.
Jeremy and Jean are with us. Hi, guys. How are you? All right, great. They're doing wonderful. Good, good. Welcome. Where you guys live? We live in Iowa.
Oh, cool. And all the way to Nashville to do a debt free scream.
Yes, sir. I love it. How much have you paid off? We paid off 130, 1000 in four years.
Good for you. Great. And what was your range of income during that time?
We started at about 100 and finished at 110. Good call.
What do you guys do for a living? I'm a pharmacist and I'm a technical writer. Oh, great. Very good. Great careers. Good for you guys.
What kind of debt was the one hundred and thirty one thousand.
What you people buy her student loans and pharmacy degree. Yeah. So I was student loans, 100 percent of it.
96000 was student loans and about 35 was personal loans.
OK, cars are just, you know, just personal.
That just odds and ends put off a little more than we can chew when we built our house. Oh, OK. That makes sense. All right. So how long you guys been married? We've been married for 12 years. OK, cool. What happened four years ago? They got this whole thing started.
Well, it started about four and a half years ago. We just finished building our house. We were settled in and we were just coasting, thought everything was doing just fine. I got this pressure like the stress and constant weight I falsely assumed because my house wasn't clean enough. And so I thought, oh, let's get a cleaning lady. So we're trying to find in the budget where we could get, you know, just eighty dollars a month for a cleaning lady and we couldn't find it.
We just start noticing every month who are spending more than we are bringing in. And every month we're like, this is not OK, we're not OK. We're not in Congress. No, this is not OK.
So we met with a new financial adviser and I was really stressed out having him work on that budget and help me find that 80 dollars. And he's like, you know, budgeting is not my strong point, but I know a guy. Oh, and he wrote down your name and the Total Money Makeover said, get this book, read it.
Wow. Ask me if you have questions. Wow. So we got the book kind of grudgingly going, OK, it's just going to be fixed expenses. Variable expenses. OK, budgeting. Yeah but when we got reading the book and I read the first success story, I had my never again moment. Wow. I read that I wanted to be on the stage right here having that piece and not feeling the stress. It wasn't for my house being not clean, it was from the money stress.
And that's not being on the same page and not feeling like we're in control.
Yeah. Hmm. Wow. Powerful. We jumped in with both feet and here we are.
Very cool. OK, so you immediately adopted the book. And so Jeremy, were you were you right in there?
I was kind of on the fence with it to start off with. I was like, OK, you're kind of a systems guy. What would you do? Right. So you had to be suspicious back to the system? I would have been.
Well, you go into it like, OK, what's what's the catch? Yeah. Yeah, that's what I that's the catch. My cynical.
And so she she got the book, she started reading it and she's like, Oh Jeremy, I love this book.
You got to read it like OK, OK.
So she was like maybe a third of the way through the book and I said I'll just pick it up and start reading it, read through the book.
And I crawled into bed at three o'clock in the morning and she was just what were you doing when you finished the book, did you.
Yes. Yes. Your first book. I have to clean my plate.
You finished? I finished the book. What's your mindset, Jerry?
My mindset went from. Yeah, right. To. This makes sense. Well, it's just this isn't rocket science, but nobody talks about this kind of stuff. Exactly. And going and going through it like build up an emergency fund, you know, pay off your your snowball.
He's like, well, yeah, that makes sense, you know, the next day. Oh, yeah, that makes sense. OK, yeah. And just got through it.
OK, we're on. Let's let's do it. That's fantastic. Jean, what was the biggest sacrifice for you throughout this biggest sacrifice?
We had to say no to a couple of things. And, you know, I refuse to buy a purse or new socks during this whole thing.
So this just for you or is the whole family just me? They keep growing over there.
They need socks. Yeah. You're in Iowa. Yeah.
Good to have those. It's very cool. Very cool.
Now that you've done it, if you were sitting down with someone that was like you were right before you started reading the Total Money Makeover, they're scared, but they're a little bit cynical, which is most of us. I mean, we've all kind of been there and they say, OK, right.
But how do you do it? What's the real key? What would you tell them? The two or three things you have to do if you're going to get out of debt because you're a success. You paid off one hundred and thirty one thousand and four years.
Touchdown, baby. You're talking to somebody who did it. OK, and you can answer the question, what would you tell them? They're listening right now, by the way. What would you tell them? That the how you got it? What are you going to do to get out of debt?
My biggest thing is contentment. Rachel, Chris talks about it all the time. But being content, look around us. We are in this wonderful country. We all have so much stuff in our house. Use what you have, you know, wear out all your old socks, like be happy, be content, find those things that make you happy. It's not your stuff. It's the people that you spend your time.
I think for for me it's just. Yeah, with the idea at the goal line, you know, thinking, hmm, that's my money. Mm hmm. But it doesn't belong to me right now. Huh. And I want that to be mine. I want it back. I want that money back. I want my money back.
It's like if you get bad service, I want my money back.
That's good. Very good. Well done, you guys.
And you brought the kiddos with you. What ages and names are they? Bring them over. Let's get them in the shot.
And we have Rowin who is ten. Come on over. Myles's too. He's he's working on coming up. Mm hmm. All right.
We have Aubrey. She is eight and we have Cora who is six. All right.
The gang is here. That's right. And how much did they understand what was going on?
It really sunk home. When we read Smart Money, Smart Kids and I each have a chore chart and work on commission and they have their own savings, envelopes and savings goals.
And so now I know what mom and dad were doing. Yes, yeah. No socks, no purses thing.
Yeah. Okay. Very cool.
Very proud of you guys. Well done. Very well done. We've got a copy, a Christmas book for you every day. Millionaires' that is the next chapter in your story for sure.
So excellent. Excellent job. All right. It's Jeremy and Jean, Rohan, Aubrey, Cora and Miles from Cedar Rapids, Iowa. One hundred and thirty one thousand dollars paid off in four years, making one hundred to 116.
Count it down. Let's say you're a debt free scream. Three to one.
That is a family that is right, there is wow, that's really, really cool. I love that mindset. That's my money. And I want it back. I want my money back. I want it back. I want my money back. Yes.
We want to tell Washington, D.C. that you guys suck. I want my money back right now. I want my money back. Yeah, you suck. I'm not going to give you money because you suck. I want my money back. That's great. You guys. You know what occurs to me when I'm looking at that beautiful family in there?
There are whole thing that they got the kids involved.
Their family tree is completely changed. And so many families, sadly, too many families in America have taught their kids that that they're victims. Right. And they taught their kids that they're not victims, not only mom and dad, not a victim, but they told the kids, you're not a victim, you know?
No, they sure have, Dave. And I'm going to tell you that passing along that mentality of the victim mentality is a shame. It's a detriment. And what you're doing is perpetuating a cycle instead of breaking it. And so you do have to think differently. You've got to you've got to make some decisions for yourself. And hopefully we can get more people believing in what is possible, not what's happened.
Yeah, right. That's the key. You know, I mean, there's evil out there. Oh, yes. Evil is out there.
But you got you know, those kids have been taught by watching their mom and dad for the past four years with four kids.
Yeah. Scratching and clawing. I mean, that wasn't an easy trick. No, that's that's not an easy trip right there. Oh, it made some sense.
They watch them and then they'll remember the time we went to that weird Borgas place that stood on screen, on stage and screen were debt free.
And I'm talking about, you know, go to commercial break. Wow. This is the Dave Ramsey Show. This is the Dave Ramsey Show, Grusovin Ramsey, personality number one, best selling author, is my co-host. Today on the air, open phones, a triple eight eight two five five two two five. That's triple eight eight two five five two two five.
Gabriel is with us in Honolulu. Hi, Gabriel. Welcome to the show Monday morning, Chris.
How are you doing?
Better than we deserve. Sir, how can we help? Well, the reason I'm calling is I just finished a baby step two, and we're going to be moving to baby step three and we should be done with that by the end of the year. I was going to ask about the 50 percent. I'm a military retiree. I received VA disability, but I also work full time job with the government. And my question is, should I incorporate the 15 percent with all the three different sources of income I'm receiving and make that one lump sum of 15 percent?
Or should I just do 15 percent of my income from my actual job? OK, so you've got three sources of income coming in right now, correct? Yeah, yes, me my wife works, she's going to be doing her 15 percent as well. OK, let me.
Yeah, you definitely want to do that. Yeah, you would do yours based off that 15 percent off of your income. All sources.
All sources. And the reason is real simple. It's not there's not a technicality involved here.
It's the more you save, the more you're going to have.
Exactly. Yeah, I understand. Yeah. So I mean you could if you say I don't want to include my retirement in that, I'm under 15 percent on the other portion. You can do that. You're just going to end up with less money.
So that's right. And Gabriel, guess what? We're not counting the company match of any type. So this 15 percent is just yours. Why? Because as we've seen throughout this Cupitt situation, there were some major companies that just shut down their bets for a little while in a way to conserve cash. So you want to control what you can control. So investing 15 percent is the way to go.
Yeah, and I really wouldn't say your wife puts 15 percent in her plan. You put 15 percent in your plan. You combine your household income, your total household income, 15 percent of that amount needs to go somewhere.
Right. And the best place to put it is with the match. And the next best place to put it is with a Roth. The best place of all is a Roth with a match. That's right. But you take match first, then Roth.
And once you've maxed out those, then you would do traditional wherever you have the best options to invest the best mutual funds to invest in.
And so it might be that you load up hers more than 15 percent of her income because she's got a match with a Roth over there. And you don't you might you might end up doing that because it doesn't matter. It's marital assets either way.
And so I'm going to put 15 add up all three of your sources plus horror's that's four sources of income and say that total annual Thom's point one five is going into something.
That's what I'm looking for into the most advantageous thing, regardless of who's names that is in flight.
Ali is with us in Houston, Texas. Hey, Ali, welcome to The Dave Ramsey Show. Hey, Dana, you doing better than I deserve? How can Chris and I help? I'm actually going to a right now, I'm going from a 30 year to a 15 year and I'm just having trouble calculating my break even point because you're trying to use the payment.
Usually use the interest rate difference. What is your current what is your current interest rate and what will your new interest rate be? My current interest rate is three point seventy five and the new 15 year will be two point one two thirds. OK, so we got one eight seven five difference, right? Can I do that right? One six three one six. I can't do them OK, crap all around it. All right. So let's call it one and a half spread.
All right. What's your balance?
My balance right now is 58. OK, so every one percent you save is 3500 dollars a year. And so we put another 1750 on top of that. And so we're at 4500 or 46 hundred bucks. Right. And so we're saving up four or five thousand dollars a year in interest. Mm hmm. As a result of this, regardless of the payment.
That's what your actual savings is, the payment is for the rest of the portions of the payment, in either case, you're going to principal. So this is the change in your expense, which is your interest. And so if you're saving 5000 dollars a year in interest, which it sounds like with around my rounding error, you're probably over 5000.
What is your closing costs on this? My closing costs is between 45000 and I have to bring another 10000 to the table to get my LTV to 80 percent. Yeah, but that's.
That doesn't affect it either. OK, because that that's actually principle, so your actual expense is only five grand. So your break even period is about a year.
OK, that's awesome. And you're going to keep the house longer than a year. You do this deal. Yeah, I think I'm going to keep it for about 18 months. That's kind of my target right now. That's borderline to scrub the screw with all this. Yeah. Y y 18 months. What are you going to go do after that? I don't know.
I'm just a very undecided person. I don't know what the future holds for me. So I know for the next 18 months I'm going to be here. OK, well, listen.
Well, yeah. Do the refinancing refinance because you just loflin and stuff. And so you put yourself in a good position. Within a year you're going to recoup. It's a smart move overall, without a doubt. And in your next real estate, buyers go with the 15 year fixed on the front end. OK, let's not have to redo and update and clean up all that 15 year fixed right out of the gate if you're not paying cash.
Yeah. OK, there we go. But the way folks, the recap is what is your change in interest rate?
Oh, drama. Write this down. And interest rate is the only expense you're saving on. Right. Everything else. The payment change from a 30 to a 15 is a principal change. That's right. But the only thing you're actually saving is so if you're saving one percent on 200000, you're saving 2000 dollars a year. And if it costs you 600 bucks to do that refinance, you got to break even period of just under two years. You divide your expense by your savings and that gives you your break, even point where you go.
It's a break, even analysis. And if you're not going to keep the house longer than that, and most of the time, the general rule of thumb is you need to be under three years, your break even point.
It should be under three years because because something's going to screw up or flip or something.
During that three years, the average mortgage stays on the books, only five point six years in America due to refinances and resales. Gotcha. OK, and so which makes sense.
But you've also said you would not refinance just to lower the rate, you know, just to lower the current law to term. I mean, I'm sorry. We definitely do. For a rate. If you've got a one percent or better rate difference, then something that really take a good look at but not the reified just to reduce term.
Yeah, because the reason in just run it out and say how quickly do I get my closing costs back with the interest saved. Right. And is that three years or under and am I going to stay in the house that long then the answer is yes. You refinance if you have a thirty, let's say you're sitting on three percent thirty right now. You're not refinancing that.
You're not refinance under three percent because you're not going get enough savings if you got three percent, 30, just calculate what a 15 year payment is calculated to make your payment is right and make the difference as an extra principal payment and it will pay off magically in 15 years. That is true because it's the reason it pays off in 15 years. Is the extra principal payment, right? The interest doesn't change that.
And, you know, sometimes people get the idea because they look at amortization schedule that are paid all the interest on the front end. No, you paid the interest on the outstanding balance the entire time you had an outstanding balance. That's exactly right, because the way amortizations work on mortgages, if you have a traditional mortgage, it's not a rip off mortgage of some kind, is it?
Is it's it's calculated like simple interest. How much interest is charged that month on that outstanding balance and all the rest of your payment? Other than that amount is going to principal. And so anytime you reduce the principal, you reduce that amount of interest. Right. And slides you forward in the Amscot. That's right.
And I want to warn people out there, with all the rates that are happening, you want to know the difference between an appraiser and your contract rate. OK, the contract rate is the advertised thing. The AP is what your payments based on. Yeah. So any other points are hidden. Fees are going to be inside the APA. So when you call a bank or lending institution, you want to know. I want to know the contract rate and I want to know the APA.
You want to know both of those.
Yeah. You can get snookered. Connection with just one. Not the best oranges without a doubt.
It's good, it's a good discussion because it is a great time to refinance right now. It really is way down. Yes, but only if you're going to stay in the house any time.
It makes sense. That puts us out the Dave Ramsey Show on the books. Our thanks to James Childs, our producer, Kelly Daniel, our associate producer and a phone screener. I am Dave Ramsey, your host, and we'll be back.
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