When to Refinance Your Home

Kiplinger's real estate guru Pat Mertz Esswein shares why now is a great time to refinance your mortgage. Also, our hosts Ryan Ermey and Sandra Block delve into the recent surge in gold prices, as well as talk savings bonds and negative interest rates.

(Image credit: Pictac)

Ryan Ermey: Interest rates are falling, but is now the time to refinance your mortgage? Our resident housing guru Pat Mertz Esswein rejoins the show to answer that exact question in our main segment. On today's show, I break down the pros and cons of playing the latest rally in gold and Sandy and I dish on savings bonds and upside bond yields in a new edition of Financial Fact or Faction. That's all ahead on this episode of Your Money's Worth. Stick around.

Ryan Ermey: Welcome to Your Money's Worth. I'm Kiplinger's associate editor Ryan Ermey joined as always by senior editor Sandy Block. We hope that you had a lovely Labor Day long weekend and are listening to us now on a Tuesday rather than a Monday.

Ryan Ermey: Sandy, how are you?

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Sandy Block: I'm good, I'm good. We're assuming that people were at the beach on Monday, so we're bringing this to you today when you're back to work or school.

Ryan Ermey: Right, however, waiting on the podcast with baited breath as always. So we wanted to chat in the opening segment here about a story that caught my eye in the October issue of Kiplinger's coming soon. The story is about gold. Gold is currently trading at around $1,500 an ounce, Sandy, which is up from about 1279 where it started the year, so that's a 17.6% or so gain in the price of gold since the beginning of the year, better than the 15.2% return year to date in the S&P 500.

Sandy Block: Wow, okay.

Ryan Ermey: So anytime gold spikes like this I get questions from friends like, "Should I just be buying gold?" It's interesting because this is the highest goal has been since 2013 and the reason it's so high is that investors tend to drive up the price of gold in the face of stock market volatility or economic uncertainty. In other words, investor sentiment and chiefly fear, that's really what we're talking about here. Fear of inflation, fear of war, some sort of geopolitical events. The kind of stuff that will drive you down into your bunker-

Sandy Block: With your gold.

Ryan Ermey: People generally drive up the price of gold. Right now there's uncertainty. So the story that our colleague John Waggoner wrote is, do you want to be chasing the rally?

Sandy Block: Right, right. Normally we'd tell people don't buy things at the top. You should wait until they go down to, so does that mean you've missed the gold train?

Ryan Ermey: I don't know if you've necessarily missed it, but you need to go into it with open eyes about what gold is and how it behaves. Gold pricing is extremely volatile. It's used as a material in jewelry making, but generally, its price is driven by investor sentiment and investors speculate on it. So it's prone to steep dropoffs. In his story, Waggoner sites a swoon between 1980 and 1998 when gold fell from $850 an ounce to $273, I don't want to commute my numbers there.

Sandy Block: Wow.

Ryan Ermey: That's a tough pill to swallow for a lot of investors, so you don't want to be speculating on it, but you may want to use a very small portion of your portfolio to hold a little bit of gold either as insurance against some sort of calamity or as a portfolio diversifier or which is legitimate because gold doesn't tend to move in tandem with the broad stock market.

Sandy Block: Now I think we've always recommended that people, if they do invest in gold, it should be just a small percentage of your portfolio, right? 5%, 10%.

Ryan Ermey: Yes.

Sandy Block: But say you do decide you want to diversify this way, the thing that's always stopped me is like, how do you buy gold? Do you go out and get some bars and then put them under under your bed or how do you... Because it's not like stocks where you call up your broker and say, give me 10 shares of AT&T or whatever.

Ryan Ermey: Yeah, well it can be and it depends. If you want it for your bunker, like if you want it because you think that paper money is going to be no good or whatever. You can buy actual bullion. You'll generally have to pay a five to 8% mark up on the price of actual goal. You can find by the way, the daily prices of gold bullion Kitco.com, K-I-T-C-O[dot]com is a good place to look for that. We'll put that in the show notes.

Ryan Ermey: You can also buy coins. You generally don't want to buy the fancy collector ones. Proofs from the US mint are a good bet. The one ounce American Eagle coin, however, will set you back $1,500 because gold is up, so you can buy coins. But the more liquid way, and I think the way that most people would want to go about it, there's a few ETFs that buy physical gold.

Sandy Block: Which means you don't have to worry about where you're going to store your ETF.

Ryan Ermey: Right, and this is more if you want to use it as a diversifier, you want to use it as a little three to 5% chunk of your portfolio. There's a couple of good ETFs that do it. Ishares gold trusts, symbol IAU, get it? AU, my shares AU, buys and sells a physical gold with a 0.25% annual expense ratio. Spider Gold Shares, symbol GLD, is another one, although it charges a little bit more in expenses.

Ryan Ermey: Then Wagner also gets into, you can invest in gold miners.

Sandy Block: Gold mining companies that that company that actually mine gold, presumably they do well when gold does well.

Ryan Ermey: Companies that mine gold. Correct. So there's Newmont Goldcorp Symbol (NEM) is one that Waggoner takes a look at in his story. A few of those firms exist.

Ryan Ermey: So then you can buy mutual funds or ETFs that invest in miners. So American Century Global Gold (BGEIX) is a mutual fund option, and then the VanEck Vectors Gold Miners (GDX) ETF is another option if you want passive exposure. So like I said, gold has gone way, way up, but that probably doesn't mean it's time to start making speculative bets on it. If you like it as a diversifier or as a ballast or as a little bit of insurance in case things go catastrophic bad, that's how you can buy it so there you have it.

Ryan Ermey: Coming up, find out if the time is nigh for a refi. Our interview with Pat Mertz-Esswein is next.

Ryan Ermey: We're back and we are here with Pat Mertz Esswein, an associate editor for Kiplinger's Personal Finance and our local maven on all things housing. Pat, thank you so much for coming on.

Pat Mertz Esswein: My pleasure.

Ryan Ermey: So we're talking about refinancing your mortgage. You have a story in the September issue of Kiplinger's magazine about just that and people used to say that you shouldn't refi unless you could cut your rate by a full percentage point, but you say that rule doesn't apply anymore. Why not?

Pat Mertz Esswein: So that's an old rule of thumb and it has merit, but the real key is will you stay in your home long enough to recoup your closing costs, to refinance through savings in your monthly payment? So if you're going to sell within the next six months, chances are the refi isn't going to pay off for you. One of the ways that you can get a sense of whether it will be worth your while or not is to use online mortgage calculators that you can find at Bankrate.com

Sandy Block: So does that mean even if you refinanced in 2018 you could possibly save money by refinancing now?

Pat Mertz Esswein: Yeah, it's possible. This week, according to Freddie Mac, which tracks mortgage rates, the national average 30 year fixed rate was 3.58% and that's almost a percentage point from a year ago. So in fact, our editor refinanced this past January into a 15-year mortgage with a rate of 4.25% and right now he's refinancing at 3.25% so he actually has decreased his rate by a full percentage point. He says he's going to save $200 a month and he will pay off his closing costs through savings in 20 months.

Sandy Block: Wow.

Ryan Ermey: It's a pretty smart cookie.

Sandy Block: Yeah, win-win.

Ryan Ermey: So are there other ways homeowners can take advantage of falling mortgage rates?

Pat Mertz Esswein: Absolutely. It just depends on what kind of mortgage you have right now. So if you have an adjustable rate mortgage and you are approaching the end of the initial fixed rate period when your mortgage interest rate doesn't change, you could use this opportunity to refi into a super low 30 year fixed rate. Or let's say that when you took your mortgage, you are first time home buyer and you took an FHA loan. Now maybe you've accumulated 20% or more equity in your home. That means that you could refinance into another non-FHA mortgage and you could get rid of the mortgage insurance that FHA applies permanently. So you'd get rid of that mortgage insurance.

Ryan Ermey: So Pat if you're convinced that you should refinance, what information do you need? What should you start putting together when you start shopping around for a lender?

Pat Mertz Esswein: To use the mortgage calculators, you're going to need an estimate of the value of your home. So you can get that estimate on websites like Zillow or Trulia or even from a local real estate agent. Then you need to see what your current loan balance is because that's the amount you're going to be refinancing, by checking your recent mortgage statement. Then it's really smart to check your credit score and that's because the higher your score and the more equity you have in your home and the less debt you carry, the lower the interest rates you're going to be able to get.

Sandy Block: So you probably want to order your credit reports and that sort of thing to see where you stand.

Pat Mertz Esswein: You could do that. Just to make sure that your credit reports are clean and don't have any misleading misleading or incorrect information.

Ryan Ermey: Well, sometimes I think we should rename this podcast to shop around because it's the advice that we give in a good portion of our segments, but obviously the advice is going to be to shop around. So what should you consider when comparing lenders?

Pat Mertz Esswein: Well, let me start by repeating that message, which is that you should try to shop widely and oftentimes people don't because it's not the easiest thing to do. So start with your bank or credit union. Try a non-bank lender like a Quicken is a well known one, but it's certainly not the only one and also try a mortgage broker.

Pat Mertz Esswein: The way to do this is to try to get quotes from all the lenders all in the same morning because rates will change throughout the day. So set aside the time to do this. Then ask each lender for what they call their par rate. That's their bottom line rate with no points added. Points are basically prepaid interest that helps you buy down your rate.

Pat Mertz Esswein: So you want to compare apples to apples and that means a par rate from each lender. Then ideally what you're looking for is the lowest combination of the rate and the closing costs.

Sandy Block: So Pat, we've seen rates tick down even though they've moved up just slightly this week, they're still down, the average fixed rate mortgage's still down from about three years ago, I think. How low can they go?

Pat Mertz Esswein: So we hit a historic low since 1971 of 3.36% in the fall of 2012. Kiplinger expects two more rate cuts to the federal funds rate coming up in September and in October. So assuming that those rates occur, we could end up back at that historic low again.

Sandy Block: Wow. Good news for home buyers.

Ryan Ermey: Yeah. Well, and before we go, I know my parents bought their house or at least their first house in Jersey back in the early '80s and the fabled mortgage rates were like, well, they were disastrously high, if you believe my father, what is the all time high for mortgage rates?

Pat Mertz Esswein: So since 1971 according to Freddie Mac, the all time high was just over 18% in 1981.

Sandy Block: Wow. Wow.

Ryan Ermey: That means you start paying that house instead of investing, you're not going to get that 18% a year in the market. Well, all right, check it out folks. The whole story, Now Is a Good Time to Refinance is in the September issue of Kiplinger's on newsstands now and Pat, thank you so much for joining us.

Pat Mertz Esswein: You're welcome. My pleasure.

Ryan Ermey: Are savings bonds a good deal for college savers and are some investors actually paying interest to hold long term government debt? Find out after the break.

Ryan Ermey: We're back and before we go, a quick game of financial fact or fiction and in keeping with our discussion of interest rates, my fact or fiction is, in some parts of the world, governments are issuing bonds that pay you less than what you paid if you hold them all the way to maturity.

Sandy Block: That sounds so unlikely. It's hard for me to imagine.

Ryan Ermey: But it is true.

Sandy Block: It's fact.

Ryan Ermey: It's a fact. Negative interest rates are happening in Europe and Germany. The inspiration for the way I wrote that particular entry, Germany recently sold 30 year government bonds at a negative interest rate. The country, the government, borrowed 824 million Euro and will pay out 795 million in 2050 when the bonds mature to the bond holders.

Ryan Ermey: So it brings up this idea of negative interest rates. It's the subject of an interview that I'm doing that may or may not be appearing in the November issue of Kiplinger's, but when you have negative interest rates, investors pay the issuer to hold their debt. Then the idea from central banks who set forth these policies is to encourage banks to lend or invest their cash rather than hold it and take a loss. So it's meant to stimulate the economy, so it means it's really cheap to take out loans. We almost touched on this when we were talking with Pat in the last segment, Denmark is actually offering negative interest rates on mortgages.

Sandy Block: Right, and I think I read that and I think it's in Switzerland, some banks are actually requiring people to pay to put their money in the bank. If you want to save, you have to actually pay instead of getting interest, you pay them to keep your money.

Ryan Ermey: Right, so that's sort of the ugly flip side of the coin, right? It's essentially a tax on savers. You earn no money or indeed lose money on cash that you're depositing in the bank.

Ryan Ermey: So the big question, the million dollar question and the subject of my upcoming interview is whether we could see negative interest rates in the US and I want you all to read that story when it comes out.

Ryan Ermey: But a sneak preview is that the subject of my interview said that, he or she doesn't think that we'll see negative interest rates here in the US but does expect short term rates to remain low between 1% and 2% through the end of 2020.

Sandy Block: Okay. Bad news for savers. Good news for borrowers.

Ryan Ermey: Yes, indeed.

Sandy Block: So here's mine, Ryan, fact or fiction, US savings bonds are a great way to save for college?

Ryan Ermey: Probably not aggressive enough for my blood, but I'm not sure if that's what you're getting at.

Sandy Block: Well, it's mostly fiction, it's not a terrible way to save for college, but the reason I want to put this out as a big caveat is that a lot of people don't under... there is a tax break associated with savings bonds used for college, but there's a huge... it's very complicated and has a huge caveat to it, but mainly it's this, I think you mentioned you might have some old saving bonds somebody gave you.

Ryan Ermey: Yeah, I have paper bonds that I know I have them, but I don't know where they are.

Sandy Block: That should be a subject of another podcast where to find your savings bonds. But here's the problem with this you can get a tax break on interest if you use savings bonds for college, but they can't be yours, you the college student. You could not have used your own savings bonds. This tax break only applies if the parents own the savings bonds. The parents have to own the savings bonds and cash them in to pay for college for their child. I think a lot of people don't understand this. They give kids savings bonds when they're young, it's a great... People give kids saving bonds when they're young all the time. They think they learn about saving and they think, well you can use it and you could use it for college, you're just not going to get this tax break on interest.

Sandy Block: So I think the rules regarding this tax break, which basically means if you use the proceeds for tuition, you don't have to pay taxes on the interest. As I said, it only applies if parents own the bonds and there are some income limits too. Now the other reason that I'm really negative on savings bonds as a way to save for college is the interest rates are terrible.

Ryan Ermey: Right.

Sandy Block: Right now the double E bond interest is 0.10%.

Ryan Ermey: Which is nada.

Sandy Block: Which is nothing and the other type of bond, the I bond, which is tied to inflation actually goes for 1.9% which isn't terrible, but the fixed rate is only 0.50%, the other rate is adjusted so it could go down and neither one of them are paying that much. If you want to save for your child's college education, a 529 plan is a much better choice.

Sandy Block: There are no income limits. There's none of this confusion about the tax breaks. Basically you put in after tax money, but withdrawals are tax free as long as the money's used for college, you can save as much as you want and you don't have to track down the paper bonds that are probably lying in your sock drawer or something like that.

Ryan Ermey: Not only that, but you can invest in mutual funds and stocks.

Sandy Block: You can invest in stocks, which is a good idea if you've got a longterm horizon. Even if you're investing for a shorter term, there are fixed income investments that will earn you much more than savings bonds.

Ryan Ermey: They're more conservative.

Sandy Block: So some of these older savings bonds, and this is just a throw away here, if you've got some old savings bonds like you might, you should look them up because they've probably stopped earning interest and they used to pay pretty well.

Sandy Block: Used to get five, 6% even on a savings bond.

Ryan Ermey: Oh, I'm rich.

Sandy Block: But for the past few years, interest rates have just been really, really negligible on savings bonds. It's just hard to make a good case for them.

Ryan Ermey: Alright, well I'll try to find the pieces of just laminated paper that have moved with me now to three different houses, so who knows where they are. But in the meantime, if I have a surprise child who I need to save-

Sandy Block: You could use your savings bonds.

Ryan Ermey: I could use mine, that's right.

Sandy Block: You could use yours, that's right.

Ryan Ermey: But if I'm saving for my hypothetical child, I'll be sure to open a 529.

Ryan Ermey: And that'll do it for this episode of Your Money's Worth. For show notes and more great Kiplinger content on the topics we discussed on today's show, visitKiplinger.com/links/podcasts. You can stay connected with us on Twitter, Facebook or by e-mailing us at podcast@kiplinger.com and if you like the show, please remember to rate, review and subscribe to Your Money's Worth wherever you get your podcasts. Thanks for listening.

Sandra Block
Senior Editor, Kiplinger's Personal Finance

Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.