Overcoming Objections with Scott Evans: Am I Saving Enough to Justify Refinancing?
I’ve been getting that question a lot lately, and I bet you have too! It’s certainly a very legitimate question. Interestingly, many customers are saving more (or less) than they realize for any number of reasons. For example:
The escrows they are paying monthly may be inaccurate.
You need to compare the principal and interest portion of their payment only.
They may have been in the loan for a number of years.
Therefore they’d be paying more on a monthly basis than if their loan was re-amortized.
And then there’s what I call the “invisible part”
Part of the monthly savings a client will realize is in the reduced interest, which obviously impacts their monthly cash flow. But when applicable, I also like to illustrate how with new terms the client begins paying more toward principal due to a lower rate. This is the portion a client typically doesn’t see because it doesn’t show up in their payment each month.
So those are a few examples of how many of us approach the issue. The question becomes: How do you get to the bottom line in a way that doesn’t completely confuse them? Here’s a step by step example of how I approach this:
- Take the loan amount and multiply it by the interest rate savings. This gives them their annual interest savings. Next…
- Divide that number by 12 to get the monthly interest savings.
- Take the total closing costs and divide it by the monthly interest savings. This will determine the client’s pay back period.
- At this point, I have a discussion with my client about how long they plan on staying in their home. Ultimately, this is how we determine, as a team, if it makes sense to refinance.
Let’s go ahead and try it with a simple example:
A client has a 5.75% rate on a $250,000 mortgage. Let’s assume total closing costs are $3,500 and we can drop him to 4.75%. A 1% reduction on a $250,000 loan will save the client $2,500 in interest in Year 1 alone (equal to $208/month). Take the closing costs of $3,500, divide that by $208 (monthly interest savings) and you determine the client’s payback period is 17 months.
I especially like conducting this consultation at my office or over coffee somewhere convenient for them. By collaborating together on the math, I find that I’m empowering my client to make a more educated decision. It’s worked great for me over the years, and I hope this little tip helps you too.