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I'm refinancing to a 3%, 5-year mortgage
Old 09-04-2011, 09:35 AM   #1
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I'm refinancing to a 3%, 5-year mortgage

I was one of a number of ER.org members who refinanced to a PenFed no-closing-costs, 10-year, 5% HE loan back in early 2008.
4.99% PenFed Home Equity Loan

At the time, I believe I had about 13 years left on a 20-year conventional mortgage at a rate around 6.5%. Our payments went up from $1000/ month to about $1350, because the benefits of the lower interest rate were more than offset by the shorter term and a modest cash out to cover some college expenses for DD. The idea of moving the payoff date up by 3+ years was one of the big attractions.

Now, 3-1/2 years later, the payback has been significant. About 75% of payments are currently going toward principal reduction, and the balance owed has dropped from $128k to $90k.

I'm about to pull the trigger on another variation of the same strategy.

PenFed is now offering the same no-closing-cost deal with a 3% rate on a 5-year HE loan. (The 61-month to 10-year rate is down to 4%.) The only "gotcha" is that I will have to increase the balance by $10,000 to meet PenFed's HE loan refi requirements.

With DD out of college, I have the cash flow to easily handle another bump in monthly payments, to about $1800. For my trouble, I'll save about $7000 in total interest and move my payoff date forward from early 2018 to late 2016...all with no closing costs.

This won't work for everyone, and it may not be 100% optimal from a numbers standpoint, but the refi payback is essentially instantaneous. I'm a happy camper.

Something to think about for those who are looking to pay off a only-a-few-years-to-go mortgage before their FIRE date...

(Note that I don't have $90k in liquid, after-tax account funds available to just pay off the mortgage today. See the countless "should I pay off the mortgage?" threads for the numbers on that strategy.)
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Old 09-04-2011, 09:46 AM   #2
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Very nice-- this seems like the best part:
Quote:
Originally Posted by Htown Harry View Post
With DD out of college, I have the cash flow to easily handle another bump in monthly payments...
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Old 09-04-2011, 10:03 AM   #3
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Quote:
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Very nice-- this [DD #1 out of college] seems like the best part:
Nice indeed.

DD#2 starts college in three years. With this strategy, I should be able to cover her last two years' expenses solely from the cash flow that otherwise would have gone to mortgage payments. After that, a few years of max savings and I'll be in good shape to settle in a FIRE date.
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Old 09-04-2011, 11:14 AM   #4
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Good job on the re-fi Htown. It'll help in the FIRE.
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Old 09-04-2011, 11:18 AM   #5
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Well done! The best mortgage is no mortgage.
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Old 09-05-2011, 10:17 AM   #6
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Harry, thank you for raising this topic. I am thinking about getting a PFCU HEL @ 2.99% and using it to pay off our 4.5%, 15-year mortgage, which has about 5 years to run.

If the HEL truly is "no cost," (no appraisal needed, etc.) then my spreadsheet shows it could save us almost $2K in interest, if we pay it off in 3 years, which would be our plan.

I'll need to check with the mortgage company as well as PFCU, to ensure there aren't any hidden costs. Since it won't, technically, be a "refi," but will actually be using a second mortgage to pay off the first mortgage, I don't see why there would be any costs other than the lien release fee for the first mortgage.

Can anyone else think of anything I should watch out for/ask about, before going down this route?

thank you,

Amethyst

Quote:
Originally Posted by Htown Harry View Post
I was one of a number of ER.org members who refinanced to a PenFed no-closing-costs, 10-year, 5% HE loan back in early 2008.
4.99% PenFed Home Equity Loan

At the time, I believe I had about 13 years left on a 20-year conventional mortgage at a rate around 6.5%. Our payments went up from $1000/ month to about $1350, because the benefits of the lower interest rate were more than offset by the shorter term and a modest cash out to cover some college expenses for DD. The idea of moving the payoff date up by 3+ years was one of the big attractions.

Now, 3-1/2 years later, the payback has been significant. About 75% of payments are currently going toward principal reduction, and the balance owed has dropped from $128k to $90k.

I'm about to pull the trigger on another variation of the same strategy.

PenFed is now offering the same no-closing-cost deal with a 3% rate on a 5-year HE loan. (The 61-month to 10-year rate is down to 4%.) The only "gotcha" is that I will have to increase the balance by $10,000 to meet PenFed's HE loan refi requirements.

With DD out of college, I have the cash flow to easily handle another bump in monthly payments, to about $1800. For my trouble, I'll save about $7000 in total interest and move my payoff date forward from early 2018 to late 2016...all with no closing costs.

This won't work for everyone, and it may not be 100% optimal from a numbers standpoint, but the refi payback is essentially instantaneous. I'm a happy camper.

Something to think about for those who are looking to pay off a only-a-few-years-to-go mortgage before their FIRE date...

(Note that I don't have $90k in liquid, after-tax account funds available to just pay off the mortgage today. See the countless "should I pay off the mortgage?" threads for the numbers on that strategy.)
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Old 09-05-2011, 11:16 AM   #7
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Quote:
Originally Posted by Amethyst View Post
I don't see why there would be any costs other than the lien release fee for the first mortgage.
Oops, I forgot to take the lien release into account. $23.75 according to payoff quote on the PFCU web site. That probably moves the payback period out to a day or two.
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Old 09-05-2011, 11:31 AM   #8
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Good deal! Not having a mortgage is a great feeling.
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Old 09-30-2011, 07:21 AM   #9
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Follow-up report. Once again, I have nothing but good things to say about the PenFed experience.

We closed on the loan yesterday. We would have been done about two weeks ago, but for equity loans Texas has a 12-day waiting period between approval and closing.

The total effort was the on-line application, a couple of e-mails to confirm that a formal appraisal would not be needed because of our low LTV ratio, a phone call to set up the closing appointment at a lawyer's office, and DW and I taking off w*rk for a couple of hours to go sign the papers. (The last being another Texas quirk - in other states they apparently send a notary to the borrowers' house.)

60 payments to go...
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