How to Refinance the Right Way
The following is a transcript of Episode #44 of the Retire Happy podcast with Roger Gainer.
All episodes of the podcast can be found at Apple Podcasts, Google Podcast, and Spotify.
Roger: A lot of our best assets, owning a company, owning stock in a company that grows like crazy, owning your own company, real estate investments, having a home, owning life insurance. There’s different ways to unlock the equity that you own without having to pay taxes.
Clark: You’re listening to “Retire Happy” with Roger Gainer, president of Gainer Financial & Insurance Services, Inc. Thanks for joining us. I’m your host, Clark Buckner. With so much uncertainty in the world today, it’s more difficult than ever to make decisions that help you progress toward your financial goals. So in this episode, Roger explains how financing can be a great opportunity for building equity when it’s used correctly. We discuss some of the common mistakes people make around debt and asset management, and he shares some wealth-building strategies you can start using today. There’s a lot to cover. So let’s dive in. And don’t forget to head on over to gainerfinancial.com for more content like this. Enjoy the show. Roger, it’s so great to be back on the line with you. We’ve got so many good things planned out today, but first, how are you doing, man?
Roger: I’m doing a lot better. We haven’t talked for a couple of months. I had a couple of health issues that I dealt with and a little surgery that came along. But feeling better, don’t use crutches or cane anymore.
Roger: I’m walking on two feet. So, yeah, feeling very good, ready to go rock and roll, and really excited to be back on the air with you, Clark.
Clark: Wonderful. I’m so happy you’re feeling better. We were worried about you. But, hey, you’re back in action. And we got some good things to talk about today. Out of all the topics, one of the ones you had was about refinancing, right? What do you have in mind for today’s conversation?
Roger: Well, you know, there’s been so many questions, especially this year, about refinancing, or, gee, I had a client yesterday, just called me and said, “Hey, I got a big bonus. My wife wants me to pay down the mortgage. Is that something I should do?” This question has come up a lot. I’ve been writing about it a couple of times already this year. Our next blog post that’ll be coming out in the next week or so is gonna be on this topic. And I’ve written about it over the years because refinancing is an opportunity. And a lot of people come into that decision, “Gee, it’s time to refinance,” without really understanding the ramifications of those financing decisions.
And as we’ve talked in previous podcasts, one of the saddest things I ever encounter is when somebody has to make the tough decision. In fact, I think that was my second blog post ever back in, you know, about seven or eight years ago called “The Tough Decision.” I was seeing neighbors and clients who were being forced to sell the home that they lived in for decades because they didn’t have enough income to live on, or they had need to pay for long-term care services, or unreimbursed medical expenses. And now the house they expected to age in place and die gracefully in is now…you know, their life is put into upheaval in their 70s and 80s, and that’s a tough deal.
And so, if you think ahead that that’s a possibility since, well, you know, that’s the number one reason people lose their homes or file bankruptcy in retirement is unreimbursed health expenses, including long-term care. So, you know, a lot of people think, “Ah, everything’s covered. I’ll be on Medicare,” but, you know, there’s a lot of stuff that won’t be. In fact, I’m just waiting for all the bills to come from the hospital to see what Medicare covered and what they didn’t. So far, knock on wood, they’ve covered pretty much everything.
Clark: That is great news.
Roger: It can take a couple months before all that stuff gets processed. So, you know, that’s really why I’ve been studying this for over 15 years, strategies. It’s why I started writing about it. It’s something I’ve been teaching clients for many, many years. I have a program where you can compare different mortgages and see how these strategies…not that long ago we talked about, you know, if you wanna pay off your mortgage in 15 years because, hey, you know, even this morning, I heard, “Oh, 1.99% for 15 years.” You’ll never see rates this low, and, you know, you think, “Wow, that’s really low. Yeah, let me get that 15-year mortgage.”
But if you get the 30-year mortgage, and you manage it as a financial tool, you can actually pay your mortgage off in less time and be in control of the equity in your home. So, as we’ve talked before, if I own a home, and I’ve got a half a million dollars worth of mortgage on it, but I have a half a million dollars of capital available to me that I can pay off that mortgage any time I want, then on my balance sheet I have zero debt, does that make sense to you, Clark?
Clark: Right. And I’ve heard you say before, using your equity to build more equity. So, that’s kind of what you’re transitioning into at this point, is that right?
Roger: Well, yeah. What I want our listeners to understand is not all debt is created equal, and mortgage debt is a type of debt called collateralized borrowing. A lot of people get into debt trouble because they borrow to finance their lifestyle. So, I’m going on vacation. I put it on a credit card. I spend $4,000 at 18% interest, and by the time I get it paid off, I’m ready to go on vacation again. But I just increased the price of my vacation by a fifth, and no matter how much time I spent trying to get great deals, I negated that entire effort by paying for it in arrears. It’s the same thing financing cars. Cars depreciate. They’re not an asset that we purchase assuming that that will increase in price, because most of the time it just doesn’t. There’s often exceptions, but not that often. You buy a car that becomes an instant classic, and it goes up in price.
Clark: They’re super rare.
Roger: Few of the new Teslas when Tesla was a brand new outfit, those early Tesla models that they discontinued now, if you got one, it’s probably worth a lot of money, stuff like that. But for the most part, for you and me and people who buy cars to drive, you know, the car loses value over time. So, the financing cost of financing your lifestyle, going out to dinner, and “Gee, I don’t have cash, so I’ll put it on the credit card,” and running up those credit card bills. I’ve seen so many people get into that kind of trouble. Young people, middle-aged people, and older folks, because, you know, “Hey, I want,” right? “I wanna go out to dinner. I wanna try that new restaurant. I don’t have the cash, but, you know, I think there’s money coming in, or I’m about to get a new job,” or whatever.
One of the sayings I’ve had for years is, people can rationalize anything. I told you about the client that moved up to Portland, and I asked him if they were saving money. They moved up there because the cost of living was less. And he said, “No, because I have to take the family to Hawaii every year for three weeks because it’s so rainy up here.” And they were very serious. It was a necessity, and that’s a rationalization. You can rationalize anything and say, well, you know, I’ve had clients making a million dollars a year and can’t save any money when they come and meet me for the first time. And they look me in the eye and say, “It’s a good thing we’re very prudent in our expenditures.” Now, somebody making $50,000 a year would say, “What do you mean you can’t save any money making a million bucks a year?” Well, you know, it’s all in how you look at it and what your self-talk is.
But credit card debt, you get on that bandwagon, and it becomes a vicious circle. I see clients do this all the time. They’re so used to just whipping it on the card. I tell them, “Look, the only way you’re ever gonna get ahead is to get out of debt, and the only way you’re ever gonna get out of debt is to take those credit cards out of your pocket because it’s just too tempting.” I can give you story after story, but that’s not what today’s episode is about. It’s about the difference of how to make debt a financial tool for wealth building versus a millstone that you wear around your neck that prevents you from ever becoming financially independent.
Clark: That makes a lot of sense. And you’ve also talked about how there’s this theme that we’ve been hearing our entire lives, “Debt is bad.” And what you’re saying here, not all debt is created equally. So, I wanna hear about the debt that might not actually be bad. What do you mean by that? And how can you use that to, you know, eventually to retire?
Roger: To build wealth?
Clark: Yeah. Build wealth and retire happy.
Roger: Okay. Well, what we’re talking about is collateralized borrowing. That’s the actual term for it. What prompted me, it’s something that I’ve talked to people about for years and years and years of how to use and control equity in things like real estate. I have clients who buy tech stocks, you know, I’ve got a couple clients who paid less than $10 for shares of Apple, and they’ve split a couple times. And, you know, 95% of the value of those stocks…of that Apple stock is gain, and they need to unlock the use of that equity because they’re retired now, and the stock doesn’t do them any good just being a share of stock.
It’s not like you can walk down to Safeway with your stock certificate and say, “Hey, lend me tonight’s dinner against this thing.” You can’t knock a couple of bricks off the porch of your house and say, you know, “My house is worth a half a million dollars. This is about 150 bucks worth of my house, and I’ll give it to you in exchange for dinner.” That’s not how it works. When you pay for your lifestyle, when you pay for food, when you pay for shelter, when you pay for entertainment, when you pay for vacation, you have to use cash, right?
Clark: Right. You can’t be using your stocks. Yeah, exactly.
Roger: That’s right. And a lot of the best assets that the wealthiest people in the country own are assets that generate zero income. So, think about, you know, today, so everybody knows what day this is, Jeff Bezos spent four minutes in space today with his brother and a couple of other people. And Jeff Bezos, he doesn’t make a salary from his company. Bill Gates stopped getting paid decades ago. Warren Buffett gets paid a dollar. All of these guys get paid a dollar so that they can be considered employees of their company and receive benefits, but they don’t want salary. They don’t want that income because taxes are highest in our system on income, ordinary income, whether it’s interest off of a bond, whether it’s your Social Security payment or a pension, or you’re taking income off an IRA, or you just bringing home a paycheck. The highest tax rates are for that type of income. And again, we’ve talked about how the tax code is part of the rule book, you know, you can’t win in monopoly if you don’t understand how the rules work. I’ve used tic-tac-toe, right? You know how to play tic-tac-toe, don’t you, Clark?
Clark: Exactly. Yes. And there’s a way you can always win.
Roger: You can never lose.
Clark: Or tie. Right.
Roger: Right. You can make sure that you’ll never lose, but the first time you played, you probably did lose because you didn’t know how to play.
Clark: Great point.
Roger: You didn’t know what the rules were. And money’s just…really, it’s just another game. I think of it as monopoly. The rules of that game are based on the tax code and the rules of finance and economics. It’s just that simple. So, a lot of our best assets, owning a company, owning stock in a company that grows like crazy, owning your own company, real estate investments, having a home, owning life insurance. There’s different ways to unlock the equity that you own without having to pay taxes.
This is one of the problems with things like IRAs and 401(k)s, tax-deferred retirement plans, is that we can’t borrow against them. It’s illegal. And when you make a withdrawal, it’s gonna be taxed as ordinary income. I’m always surprised when people say, “Well, gee, I got a million and a half dollars in my 401(k) at work.” And I try to explain to them, well, how much they’re gonna actually get to spend of that money. It’s not about how much you make, it’s not about how much you have, it’s about how much of that do you get to spend. So, for most people, about a third to half of the money in their 401(k) belongs to the taxman, whether it’s the federal taxman, or the state taxman, or the local taxman, or a person. When that money comes out, you’re gonna pay tax. Well, it’s the same thing with that appreciated Apple stock. If I wanna convert that into cash so I can spend it, I’m gonna pay the taxman.
So, a lot of times we get clues about the most efficient way to do things by looking at the very wealthiest people and how they use their money. And that was my inspiration for this particular blog post is an article in the Wall Street Journal that reminded me of this lesson, and it was based on a theory that they talk about on Wall Street with very rich clients called buy, borrow, and die. And it is incredibly efficient under our current tax code. So, let’s talk about that person that owns, you know, a piece of property. They got a nice little rental property. They’ve owned it for 30 years. They’ve got solid tenants. But it’s appreciated like crazy, and they need money for opportunities, or they just need more income. So now they can, instead of selling and paying a huge amount of tax, because they’ve depreciated, and virtually the entire value of the property is now gonna be taxed as gain, borrow against that equity because, like we’ve talked about before, real estate equity earns a zero percent rate of return, right? You remember that?
Roger: So, if I borrow at today’s rates, and I’m paying 3%, I can easily turn around and not speculate, but I can make more than 3%. And if you itemize, you even get a subsidy from Uncle Sam on that particular type of borrowing. There’s a lot of borrowing against assets that can create tax deductions against gains or income. It happens all the time. We make these plans all the time. So, if I can access my wealth without paying taxes, and this has been in the news a lot, how come these rich people don’t pay any taxes? And they leaked a bunch of people’s tax returns that aren’t paying, you know, very much if anything. And this is how they do it. They borrow against their assets because they know when they die, those assets go to their heirs and get what’s called a step-up in basis. So, when the heirs turn around to pay off that debt when they sell those assets, that highly appreciated piece of real estate or that highly appreciated Apple stock, they’re not paying tax when they sell it, and they use those proceeds to pay off the debt.
Clark: And it is a cycle that repeats.
Roger: Yeah. Wash, rinse, repeat. And what’s really interesting when you dig down. When I was first introduced to these concepts, you know, over 25 years ago, I said, “Oh, no, that’s bad.” I’m no different than anybody else. I was raised that way, you know. My dad lived through the depression as a child and taught me these kinds of lessons. But then I started digging down asking questions when people showed me concepts, and it made all the sense in the world for me to control the equity. Think about your home, right? Back in 2008, we were told that the Great Recession or Depression, it depends, you know, who you’re talking to, that that was because people borrowed too much money. And I would put it to you that they didn’t borrow too much money. They didn’t borrow intelligently.
And borrowing to diversify and having cash and access to capital actually makes you safer. So the people that used those crazy loans that were available back in the early 2000s, the interest-only loans, what they call option ARMs, adjustable-rate mortgages that you could pay 1% on. Well, if you had the discipline to deposit the difference and earn a rate of return on that, you could really build wealth and have it subsidized by a bank. But most people, they said, “Oh, this is great. I reduce my monthly payment, and now I can go spend more money.” And instead of paying off these debts on their balance sheet and building wealth because of the opportunity that had been handed to them, they used that borrowing to subsidize lifestyle, and then when values went down, bang, it was over. You were in trouble, and you got foreclosed. You lost your job, and you couldn’t subsidize non-economic real estate that you bought. The rents didn’t cover the mortgage and the taxes, you know, that sort of thing.
So, there is such a thing as being over-leveraged, and maybe in another session we can talk about that. But I’m just trying to get through the concept that these types of borrowing against tax-deferred assets that are growing, not only can multiply your wealth, but they can reduce your risk, right? If I’ve got a house, this was fairly typical in large parts of the country. If I had a house say it was worth half a million dollars in 2007, the recession came, and the bank foreclosed on me, and I’m out in the street. But if I had cash in the bank, if I managed that equity, even losing my job I could keep paying for the mortgage, I could buy distressed property. I can tell you all kinds of stories about people that made a fortune in the subsequent years because they took advantage of buying these assets for pennies on the dollar, you know. So, if you had cash in the bank, if I had that half a million-dollar house with a $450,000 mortgage on it, but I had $450,000 in the bank, I didn’t sweat anything. In fact, I laughed my way to increasing my wealth because of the opportunities that cash presented to myself. Does that kind of…
Clark: It does make sense.
Roger: …draw the concept together? Now, another thing in your personal home, you know, clients come to me and they say, “Over the next two years, I wanna make some changes in my house. I wanna make some improvements. I wanna add a room. I wanna redo the kitchen,” whatever it is. And they start taking that money out of their cash flow, or selling assets, or drawing out of retirement plans and paying taxes and financing the work that way. So, let me tell you what we did in our family just last year during the pandemic.
I’m just about to close on refinancing my house. The house has increased dramatically on paper in the last few years. But I live there, and I’m not looking to move. So, it doesn’t matter how many hundreds of thousands of dollars the value went up on paper until I sell, I didn’t make a dime. And as we mentioned earlier in this podcast, home equity and real estate equity earns a guaranteed zero percent rate of return. And if any of our listeners want a greater explanation of that, we don’t have time for it in today’s podcast, call us at the office, 415-331-9030, or stop by the website and send me a question, and I can walk you through the proof that your home equity has nothing to do with whether the value of the house goes up or down. And that’s the proof that your equity earns zero.
Clark: Got it. So, what you’re saying is you could own a mansion, and you could either…let’s say you’ve paid it off, that does not make it more valuable, versus you still owe a lot of money on it, is that what you’re saying? Basically, I don’t wanna get too much into it. I just wanna make sure I’m following you.
Roger: Yeah. I remember back there was some flooding in about 2003, 2004 in Utah. No, it was in Texas, Port Arthur, Texas. And big hurricane came through, and they were interviewing the mayor on CNN. And he was directing, and people were being saved, and rescuers were all over the place, and the flooding was horrible. And they said, “Gee, you know, how are you handling all of this?” And he said, “Well, you know, we just have to take care of our citizens.” And the reporter said, “I heard that your home washed away in the flood.” And the Mayor looked at him and said, “Yes, it did, and the sad thing is I just paid off my mortgage last week.”
Clark: Oh, no.
Roger: Okay? He didn’t say, “The good thing was I paid off my mortgage.” See, the bank shares the risk. If I have it paid off, the risk is all on my shoulders. If the value of real estate, and I know a lot of us don’t remember when real estate values went down, it wasn’t all that long ago. But if the value goes down, and my equity is under my control outside of the home, I didn’t lose any money on my balance sheet, right?
Roger: One of the great lessons learned in 2008 is I’m better off owing the bank a higher percentage of the value of my home instead of a lower percentage, because, if I get in trouble on that mortgage because I lost my job or something else happened, if there’s a low loan-to-value ratio, the bank’s coming after me because it’ll be real easy for them to sell my property quickly and pay themselves back. And they don’t care if they got top dollar, they just care if the loan’s paid off.
There are still people out there today that haven’t made a payment on their mortgage since 2009, and the banks carry them on their books because of the high debt level, probably very few of these left, but, you know, as recently as a couple of years ago, because of that high ratio, the bank didn’t wanna put that stuff on their balance sheet and charge off the loan. So, they just let people live there. So, you had less risk if you owed more money because the other side is diversification. You’ve heard about diversification, right?
Clark: Oh, yeah.
Roger: Yeah. And why do we diversify? To reduce risk. So, if I’ve got a house, then I got one asset. If I’ve got a house and a bunch of cash, I have two assets. I’m diversified. If I use that cash to create other assets, I’m diversifying even more. So I’m actually managing my wealth by using debt to diversify and reduce risk. Boom, let that sink in for a minute.
Roger: So, circling back, we’ve lived in our house for about over 15 years. And, you know, houses get a little tired after a while, and I don’t know anybody who ever owns a house for more than a couple of years that doesn’t come up with a million things they wanna do to the house, right?
Roger: You sit there and go, “Wow, we could put up X over there. We could redo the backyard and do a Y. Gee, I wish we had a pool,” you know, whatever it is. And when clients come to me with that, if they have financial discipline, I encourage them to let the equity in the house improve the house and maintain the house. So, what we did, we did quite a bit of work. We upgraded the bathrooms, we did a massive amount of landscaping, and we really added a lot of value to the house. And the way we did that is I took out a home equity line of credit or a HELOC secured by the home.
Now, when you understand a HELOC, in the early years when you’re drawing on it, all you do is pay interest. And I itemize, so I get to deduct that interest against my income. And so, I’m getting a subsidized interest rate that’s extremely low. Once the work was finished, now I’m combining the equity line with my first mortgage, and we’re getting a ridiculously low-interest rate, and we’re gonna free up over $1,500 a month, which will go into paying off the mortgage by accumulating it in a low-risk vehicle that’s gonna pay me more than the 3% interest that I’m gonna pay.
Clark: So it’s like the borrowed money is making you money?
Roger: Yeah. And all I’m doing is I’m just managing them. The money I put in actually got me…because I was…I didn’t do a bunch of customization that won’t get me more money from a buyer. I did things that took dead spaces in my house and on my property and turned them into vibrant living spaces so that now…and especially since COVID, we have as much living space outside as we have inside.
Clark: That’s great.
Roger: Oh, yeah, it’s great. And it feels like we’re on vacation. So, the bottom line with that is that I’m gonna pay off that mortgage, but I’m gonna pay it off on my balance sheet. I’m freeing up cash flow, which reduces my risk if we get it…you know, being a business owner, some months or years are better than others. So, if I have a bad year, I don’t have to sweat the mortgage payment as much. Maybe I won’t add to paying down the mortgage. That’s the other problem with those short-term 15-year mortgages. You lose your job, and you’ve got twice as big a mortgage payment as the 30-year, you know, if I can handle the 15-year, I can handle it today, but I don’t know if I can handle it in 5 years or 10 years.
Clark: That’s a good point.
Roger: You want the lowest required payment to maintain your asset. And then if I can put a small interest rate, and I actually have a calculator here that can show you that you don’t even need to make 3% on that equity to have a 30-year mortgage paid off in 15 years. At least have the option of paying it off because you don’t know. You can’t tell me in 15 years if your best move is to have a paid-off house. So this way you get the choice, you know. I may want the tax deduction at that point because I’m gonna take money out of my IRA.
Clark: So, it’s interesting because there are so many different strategies. There are so many paths to take. We’ve heard you share in previous podcast episodes before, not all debt is equal. We’ve heard that again today. We’ve heard the strategy of using your equity to build more equity. So, it goes on and on. But one of the final things I wanna kind of leave the listeners with is that next step that someone can take. So, you know, there’s different routes to do this, and there’s different circumstances, different risk tolerances, all of that. So, what’s the next step for someone to connect with you and to learn about which path is right for me? Which vehicle should I be using? Which one should I not be using?
Roger: Well, in our process, we go through what the options are, but only after we determine what you’re comfortable with, what you’re trying to accomplish, where do you stand here, and what are the roadblocks that we have to deal with to make sure you get where you wanna be. So, once we can establish where we wanna get to, when we wanna get there, and what is gonna help me be comfortable on the journey…and sometimes there’s some education involved, because we’ve been taught certain lessons like pay off that house as quickly as possible. And it’s, you know, our parents, our uncles, our aunts, our grandparents have hammered this on us, and we wanna honor them. They’re our family members.
But I encourage people to keep that open mind, and you can contact us through the website at www.gainerfinancial.com. And we can set up a free consultation to see if I’m the right person to help you figure out what path is best for you. You can call the office, 415-331-9030. Matt will help set up a time, and we can talk for 30 to 45 minutes at no charge to see if it’s a fit. We have lots of tools here to help you understand what the actual costs are of different strategies, what the risks are, and what the rewards are, because you gotta…there’s no free lunch, and there’s a risk to almost everything, even keeping cash in a box has a risk, right?
Clark: Right. Yeah. Exactly.
Roger: Exactly. So, give us a call. If you’re too shy to call us, go to the website and download our thought organizer, because that’ll help you figure out the path as well. And if you go to the home page, scroll to the bottom, and there’s a little button, and you can download the thought organizer. We’ve talked about that tool before. But clarity, knowing where you’re going, you know. George Harrison had a song that I particularly like, “If you don’t know where you’re going, any road will get you there.”
Clark: That’s so good.
Roger: And that was based on a sign that he saw on a fence post in the middle of nowhere in Hawaii with his son. But that’s true, you know. So, do you get on an airplane that the pilot has no idea where you’re gonna land?
Clark: No way.
Roger: Let’s just cruise around and find a place? No. So, why would you use that strategy to plot your financial future? Anyways, I hope our listeners understand the difference now between collateralized debt, where you have a growing asset, you’re borrowing at a better interest rate than that asset, in other words, a lower interest rate than the asset is growing at, so your wealth continues to build. You reduce your tax exposure. You reduce your risk by diversification and increasing liquidity. So, there’s some really strong benefits to looking at these kinds of strategies.
Clark: Well, Roger, as always, thank you for taking the time to walk us through this, and looking forward to our next session. I can’t wait.
Roger: All right. Well, it’s good to be back, Clark.
Clark: Roger L. Gainer, RICP, ChFC, California Insurance License Number 0754849 is licensed to sell insurance and annuity products in California, Illinois, Arizona, and Nevada. Roger L. Gainer is an investment advisor representative, providing advisory services through HFIS, Inc, a registered investment advisor. Gainer Financial & Insurance Services, Inc is not owned by or affiliated with HFIS, Inc, and operates independently.
Roger holds the coveted and well-earned designations of Chartered Financial Consultant (ChFC®) and Retirement Income Certified Professional (RIPC®) from the American College. He is also a licensed insurance agent for life and health insurance and a Certified Paralegal for Estate Planning.