Why Refis Are Spiking and How to Optimize Your 401k Target-Date Fund for Long-Term Growth
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this comprehensive episode, the Smart Money Podcast team explores two critical financial topics that every professional should master. First, they dive into the current mortgage refinancing surge with NerdWallet experts Kate Wood and Holden Lewis, revealing why (02:34) half of all mortgages are now refinances despite limited rate improvements, and explaining the key difference between rate-and-term refinances versus cash-out refinances (07:22). The second half tackles retirement investing fundamentals, where investment writer June Sham breaks down target date funds—the ultimate "set it and forget it" investment strategy that automatically adjusts risk allocation over time (15:43). Through real listener Jay's question about his $29,000 retirement savings at age 35, they provide actionable guidance on contribution benchmarks, fee comparisons, and why even financial experts choose the lazy investor approach for their own retirement accounts.
Speakers
Sean Piles (Host)
Co-host of NerdWallet's Smart Money Podcast and Certified Financial Planner (CFP). He brings years of financial planning expertise to help listeners navigate complex investment decisions and retirement planning strategies.
Elizabeth Ayola (Host)
Co-host of NerdWallet's Smart Money Podcast and personal finance expert at NerdWallet. She specializes in making financial concepts accessible and actionable for everyday investors and savers.
June Sham
NerdWallet investing writer specializing in retirement planning and investment strategies. She recently revamped NerdWallet's comprehensive retirement articles and provides expert analysis on target date funds and portfolio management.
Kate Wood
Home mortgage expert at NerdWallet with extensive knowledge of refinancing trends and mortgage market dynamics. She provides strategic insights on when refinancing makes financial sense for homeowners.
Holden Lewis
Home mortgage expert at NerdWallet specializing in mortgage rate analysis and refinancing strategies. He offers decades of experience tracking mortgage market trends and helping consumers navigate complex lending decisions.
Key Takeaways
Calculate Your Refinancing Break-Even Point
Before refinancing, determine when your monthly savings will exceed closing costs (typically 2-6% of loan amount). Only proceed if you'll stay in your home beyond this break-even timeline—which can stretch 6-8 years. (04:47)
Target the 0.75% Rate Drop Threshold
Don't refinance unless you can secure a mortgage rate at least three-quarters of a percentage point below your current rate. This ensures meaningful monthly payment reduction that justifies transaction costs. (03:17)
Leverage Cash-Out Refinancing Strategically
Consider cash-out refinancing to consolidate high-interest debt (21% credit cards to 7% mortgage) or fund home improvements that increase property value. 60% of current refinances are cash-out, not rate-and-term. (08:03)
Focus on What You Control in Retirement Planning
While market forces and Fed decisions remain unpredictable, consistently contributing 10-15% of pretax income to retirement accounts provides stability amid uncertainty. Don't let benchmark comparisons derail steady progress. (20:11)
Choose "Through" Over "To" Target Date Funds
Select target date funds with "through" glide paths that continue adjusting asset allocation after your target retirement year. This provides flexibility if you work longer and prevents premature shift to overly conservative investments. (18:53)
Statistics & Facts
- About half of mortgages are refinances this summer, though hardly anyone is getting a mortgage nowadays due to depressed home sales. (02:34)
- Refinancing closing costs are usually 2% to 6% of the loan amount - for a $300,000 remaining balance, that's $6,000 to $18,000 just to complete the refi. (04:29)
- There was a brief four and a half month period from August to December 2023 where mortgage rates spiked higher than 7.25% and even approached 7.75%. (06:18)
- According to the Urban Institute, about 60% of refinances these days are cash-out refinances. (08:03)
- The industry average for target date fund expense ratios was 0.29% in 2024 according to a Morningstar report, though some can be found below 0.1%. (17:22)
- Most experts recommend putting away 10 to 15% of pretax income towards retirement. (23:37)
- According to the Survey of Consumer Finances, the median retirement savings for people age 35 is just under $19,000, and for ages 35-44 it's $45,000. (25:03)
