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Deal, or No Deal?
Old 12-05-2009, 03:10 PM   #1
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Deal, or No Deal?

What do you look at when making a decision about whether to refinance your mortgage? I was in the bank today to price a larger safety deposit box, and noticed the rates for a 30-year fixed mortgage were below 5%. The rate on my existing loan is 6.5% so I thought this might be worth looking into even though I am planning to retire in four years. There were several people in line in front of me to talk to the mortgage banker there, and I didn't want to wait that long, so I went to the bank that holds my mortgage. They have what is called a three-step refinance, no reappraisal required, just fill out the forms. The rate for that loan is 6.125% which I thought would not be worth bothering with, but actually it would reduce my payment by over a hundred dollars a month, even if I add extra principal to keep my theoretical payoff date the same. (I plan to sell the house when I retire.)

The rule of thumb I've heard in the past is it isn't worth refinancing for less than two percentage points or less than two years, but IIRC that's assuming there are closing costs added onto the existing loan. The only other thing I can think of to check is how much of the loan I will have paid off four years from now. It wouldn't make sense to me to refinance if it would result in a significantly higher remaining loan balance in four years, but otherwise I can't think of any reason not to do it. What are the pitfalls to watch out for? What questions do you ask yourself when making this kind of decision?
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Old 12-05-2009, 03:33 PM   #2
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Get thee to: Home

Tons of information on how to look at the decision and what factors matter. I would suggest that a refi is quite likely to be a no-brainer for you.
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Old 12-06-2009, 02:08 AM   #3
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Get thee to: Home

Tons of information on how to look at the decision and what factors matter. I would suggest that a refi is quite likely to be a no-brainer for you.
Thanks for the link. When I ran the numbers on the one question I could think of, this turned out not to be such a great idea. If I do the "three-step" refi now, I end up with about $6000 more balance remaining in 4 years than I do if I stay with my existing loan. I could probably improve on that with a completely new loan but that would involve getting re-appraised plus closing costs and that's more hassle than I'm willing to let myself in for at the moment. Maybe if the rates go down another few eighths it will become an offer I can't refuse.

I guess passing up a refinance from 6-1/2% to 4-3/4% is one of those "non-optimum financial actions".
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Old 12-06-2009, 07:59 AM   #4
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A lot depends on what your loan balance would be and the cash costs to refinance, but I find it hard to believe that you would not come out way ahead by refi'ing. Shop aroudn with other lenders to see what their offer might be. Unless you have a very small loan or very high cash costs, 6.125% no cost for a refi sounds like you are getting taken advantage of.

If nothing else, go look at the Pen Fed home equity loans. They will do a 20 year loan for 4.99% and I think they eat all the refi costs.
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Old 12-07-2009, 10:33 AM   #5
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A lot depends on what your loan balance would be and the cash costs to refinance, but I find it hard to believe that you would not come out way ahead by refi'ing. Shop aroudn with other lenders to see what their offer might be. Unless you have a very small loan or very high cash costs, 6.125% no cost for a refi sounds like you are getting taken advantage of.

If nothing else, go look at the Pen Fed home equity loans. They will do a 20 year loan for 4.99% and I think they eat all the refi costs.
I do have a pretty small loan balance. It's under $70K. I probably would come out ahead by going from 6.5% to <5%, but I don't want to do the paperwork and clean up my house so I'm not ashamed for the appraiser to see it. That's the sub-optimal part. Maybe if I get the calculator and look at the actual numbers I will be motivated. If it makes enough of a difference to move ER up by a year, I could get highly motivated.
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Old 12-07-2009, 02:52 PM   #6
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Originally Posted by kyounge1956 View Post
What do you look at when making a decision about whether to refinance your mortgage? I was in the bank today to price a larger safety deposit box, and noticed the rates for a 30-year fixed mortgage were below 5%. The rate on my existing loan is 6.5% so I thought this might be worth looking into even though I am planning to retire in four years. There were several people in line in front of me to talk to the mortgage banker there, and I didn't want to wait that long, so I went to the bank that holds my mortgage. They have what is called a three-step refinance, no reappraisal required, just fill out the forms. The rate for that loan is 6.125% which I thought would not be worth bothering with, but actually it would reduce my payment by over a hundred dollars a month, even if I add extra principal to keep my theoretical payoff date the same. (I plan to sell the house when I retire.)

The rule of thumb I've heard in the past is it isn't worth refinancing for less than two percentage points or less than two years, but IIRC that's assuming there are closing costs added onto the existing loan. The only other thing I can think of to check is how much of the loan I will have paid off four years from now. It wouldn't make sense to me to refinance if it would result in a significantly higher remaining loan balance in four years, but otherwise I can't think of any reason not to do it. What are the pitfalls to watch out for? What questions do you ask yourself when making this kind of decision?
I use some common sense math:

If I save 8% per month on my payment, it gets my attention- that means I save 1 payment per year. The lower your rate, the tougher it is to save 8%.

Meaning with a 6.5% rate, knocking payment down 8% is easier than if rate started lower , like 5.75%.

In addition, some constraints to remember:
1) the 8% savings needs to be on same "period". If you are on year 8 of a 30 yr fixed, you need to save 8% per month on a 22yr repayment plan with lower interest rate.

2) The 8% is a guideline, because I decided that 8% is a significant amount of my budget. Saving 5% did not get my attention when I run numbers for me.

3) You used a "break even" point in your description- that is another way to figure it out. One issue I have with "break even" is that I really did not lose money except on paper even before a given time period- I am more focused on my monthly budget, and how much savings in the budget is worth my work and effort to refinance.
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Old 12-07-2009, 03:13 PM   #7
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Going from 6.5% to 5% will save you close to 1.5% a year for the first couple years. 1.5% on $70,000 is $1,050 a year. For example, if your closing costs are around $3000, you break even in 3 years roughly speaking.

The penfed 20 yr 4.99% fixed rate home equity loan with no closing costs seems a no brainer. I happen to have one myself, in the 10 year variety.
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Old 12-07-2009, 03:14 PM   #8
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CashCall Mortgage - Today's Latest Updated Rates

These are the rates today at a local company in SoCal. The no cost 30 yr fixed went up from 4.875% on Friday.
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Old 12-07-2009, 05:40 PM   #9
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FWIW, rules of thumb are OK for a rough guide, but they are no substitute for doing the math. The calculators freely available at the professor's site make this a trivial exercise.
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Old 12-07-2009, 07:39 PM   #10
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A lot depends on what your loan balance would be and the cash costs to refinance, but I find it hard to believe that you would not come out way ahead by refi'ing. Shop aroudn with other lenders to see what their offer might be. Unless you have a very small loan or very high cash costs, 6.125% no cost for a refi sounds like you are getting taken advantage of.
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If nothing else, go look at the Pen Fed home equity loans. They will do a 20 year loan for 4.99% and I think they eat all the refi costs.
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FWIW, rules of thumb are OK for a rough guide, but they are no substitute for doing the math. The calculators freely available at the professor's site make this a trivial exercise.
When in doubt, calc it out.

That's what I did on the bus on the way to work this morning. Even assuming there were no closing costs on the Pen Fed loan I don't think it will make enough of a difference for me to bother with it. Here are the numbers:
Current loan: existing balance $68,656 at 6.5% interest=P & I $556.22/month, remaining balance after 4 years (assuming no extra principal payments)=$58,417.54.

Pen Fed 20 year refi at 4.99%, no closing costs: same existing balance, P & I=450.84/mo, remaining balance after 4 years (again, assuming no extra principal payments)=$59,792.35

Pen Fed 20 year refi at 4.99% but pay the same P & I as the existing loan: the remaining balance after 4 years would be $54,183.82.

Since I plan to sell this house and move to a less expensive part of the state at retirement, every dollar reduction in the remaining balance four years from now is a dollar straight into my retirement portfolio. (And it's a tax free dollar, because I'll almost certainly be under the capital gains limit. )

So, if I refinance now but pay the same payment, it will make a difference of $4233.72, and my first thought was that an extra $4K in my portfolio wouldn't even change my ER date by enough to make up for the time it would take me to apply for the new loan, and a little more math bears that out. The extra $4K at a WR of 3.5% is an additional $148.18 a year, or a tad over $12 a month. (Inflation adjusted!! ). The pension calculator on the retirement site says it would take a month or six weeks for my pension to go up by that much. For six months I could get interested, but six weeks just makes me yawn. Maybe on the bus on the way home I will figure out how low interest rates would have to go to save me six months, but I suspect I will find myself in a catch-22: any benefit on the mortgage equity side will be canceled out by the several months of contributions that won't go into my retirement accounts if I retire that much earlier.
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Old 12-07-2009, 09:25 PM   #11
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Sounds like a 5/1 ARM could be an option as well. That ought to be an even lower rate, fixed for 5 years. A no-cost loan for slightly above 5% should be well worth the trouble. No need to clean the house. You only have to be kess than 80% loan to value. Sounds like you've probably been in the house a while and don't have much of the old loan duration to go. The paper work isn't that bad. I went through it this summer to reduce my rate from 6.125% to 4.375%, though I'm keeping the loan the full 30 years. Look at Bankrate.com or someplace similar for lower rates than your bank is offering.
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Old 12-07-2009, 11:39 PM   #12
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Sounds like a 5/1 ARM could be an option as well. That ought to be an even lower rate, fixed for 5 years. A no-cost loan for slightly above 5% should be well worth the trouble. No need to clean the house. You only have to be kess than 80% loan to value. Sounds like you've probably been in the house a while and don't have much of the old loan duration to go. The paper work isn't that bad. I went through it this summer to reduce my rate from 6.125% to 4.375%, though I'm keeping the loan the full 30 years. Look at Bankrate.com or someplace similar for lower rates than your bank is offering.
I have been in the house for 13 years next month but the existing loan still has over 26 years on it because I refinanced 3 years ago to get cash out to replace my car. I've been playing around with the numbers some more and I just don't see anything that interests me much, and I think it's because I plan to sell in four years. If I were going to be here longer it might make more of a difference. ISTM there are three possibilities:
  1. I could refinance and get a lower payment, but then the remaining loan balance will be higher when I sell and there will be less money to add to my portfolio than if I'd kept my existing loan, which will require me to work a bit longer.
  2. Or, I could refinance but make the same P & I payment as my current loan. That would mean a lower remaining balance when I sell, but as I suspected, when I consider the amount I wouldn't be contributing to my tax-deferred accounts as well as the increased net from sale of the house, it only makes a difference of about 6 weeks in my ER date.
  3. Or I could just not bother.
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Old 12-08-2009, 07:16 AM   #13
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The small loan balance makes this less juicy. Still, 4 grand in a few years for a few hours of work gets my nipples hard...

YMMV, obviously.
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Old 12-08-2009, 09:45 AM   #14
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(snip)

YMMV, obviously.
It does, it does. Any sort of big market dip would completely swamp the effects of the refi on the negative side, and if we get a substantial COLA any year in the next four I think it would swamp the effects on the positive side. I will keep an eye on the rates my existing lender is offering for the three step refinance. Getting $4k/six weeks earlier ER for a truly negligible amount of effort, I could go for. Otherwise, I'm going to be lazy and non-optimal.
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Old 12-08-2009, 02:07 PM   #15
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My suggestions would be to try to find a no point, no closing cost loan, or as close to one as you can get to one these days. Then it makes it easy to see if you should refinance because almost any lower rate is good.

Don't just accept the rates the banks publish. I found the lowest no point, very small closing cost rate on the Internet and asked my current mortgage holding bank if they could beat that rate in a refinance. I don't remember now if they beat it or matched it. I think they matched it but gave me a low doc loan so that saved my time. I think the break even period on the closing costs was under 6 months so it was a no brainer to do the refinance.
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