Mortgage refi - What am I missing?

[nash031]

I'd like to crowd source this in case I'm missing something:

Situation: Purchased our house in October 2018 with 30-yr, fixed rate VA mortgage at 4.5%. Rates have lowered substantially since then. Mortgage agent approached me about refi options this week.

Outlook: Two little girls, 4mo and almost 3, will attend the elementary school within walking distance. I retire from Navy in 6mo, wife plans to work about 10 more years. We plan to stay in the house until DD2 is out of elementary school, and then may move, roughly 10 year horizon in the home. We are 85% FI right now with current expenses, but 100% and then some if wife works the 10 years regardless of what I do.

Options (all 30yr fixed):

1. No-cost: Lender credits all costs, principal remains same at ~$618,000. Rate drops to 3.875%, saving ~$254/month.
2. VA funding fee rolled in: Lender credits all costs except VA fee, roughly $3,000, which is rolled into the loan. Principal to ~$621,000, rate drops to 3.625%, saving ~$328/month. Between home equity and cash flow differences, this option pays for itself in 26 months vs. option #1.
3. All fees rolled in: We pay all closing costs, but roll them into the loan. Principal to ~$625,000. Rate drops to 3.375%, saving ~$394/month. Between home equity and cash flow differences, this option pays for itself in 40 months vs. option #2.
4. Do nothing, remain at 4.5% for 29.4 more years.

Discussion: The mortgage agent "likes" option 2 the best. His reasoning is the balance of the 26-month break even alongside the 3.625% rate is the best alternative. Based on VA rules, the earliest we could consider a re-fi is if rates go down by 0.5% after six months. Versus option 3, where he seems to believe we'd be locked into that loan by paying the higher expenses up front (into the loan), with fewer options on the table until 40 months.

I believe that he is pushing that option vs. option 3 because it opens future doors for another re-fi down the road, wherein he can make additional money on transaction costs.

While a refi seems like a no-brainer to me, I'm curious as to which option you all find most attractive.

Questions:

1. Based on our outlook, which option do you like? Why?

2. Is there another reason I'm missing that he'd push option 2 vs. the others?

Thanks for your consideration and inputs!

 

[RunningBum]

I'd do option 3. Don't forget that lets you keep ~$4000 in cash, which you could invest. Rolling the closing costs into the loan doesn't really cost you any money if you can get the same investment return on that $4000 as the mortgage rate, and you are getting the rest of the mortgage cheaper by 0.25%. Seems like the clear choice to me unless I'm missing something.

Or option 4, see if rates go even lower in the next few months, as they appear to be headed down.

 

[RetireBy90]

Well, option 2 does pay off in 26 months so if something changes and you decide to move your time frame to break even is short. Where option 3 will be cheaper if you stay for the 10 years projected. Over 10 years it would cost about $8K less in payments.

I would ask myself, why do I want to refi? (Certainly I would be interested if mine wasn’t already at 3.5%) But there are various reasons to refi, save on monthly payment, pay off the loan sooner if you keep same payment, save on total amount of interest over the expected life of the loan and I’m sure there are others. Determine what you expect from the refi and let that guide you.

 

[nash031]

Or option 4, see if rates go even lower in the next few months, as they appear to be headed down.

Digging just a little bit, it seems that rates have only been lower than they currently are off and on for two years in 2015-17, and again back in 2012. Part of me is thinking very much about a bird in the hand...

 

[nash031]

I would ask myself, why do I want to refi? (Certainly I would be interested if mine wasn’t already at 3.5%) But there are various reasons to refi, save on monthly payment, pay off the loan sooner if you keep same payment, save on total amount of interest over the expected life of the loan and I’m sure there are others. Determine what you expect from the refi and let that guide you.

I don't expect that this is our "forever" home, (and I don't really believe in that concept anyway). I do expect that this is a longer term home considering we've only lived there 6 months and have no intention of moving. Wife loves her career, I don't really intend to have another one.

Pretty much looking to reduce expenses headed into my retirement, and save money over the longer term. Not interested in paying off the loan earlier/faster.

 

[RetireBy90]

Then if reducing costs is the goal, why not option 3? When I retired from Army I cut every expense I could including a refi to reduce our required income as it had been a while since I hunted a job.

As far as option 4, I’m not smart enough to know where they will go. I would have bet that they would never go this low but here we are.

 

[ivinsfan]

Any chance you have a service connected disability? I believe the VA funding fees go away if you have even a 10%..however it's my understanding the paperwork for the disability has to be filed before you do a refi..not approved but filed.

Might not help you but could help another.

 

[RunningBum]

Digging just a little bit, it seems that rates have only been lower than they currently are off and on for two years in 2015-17, and again back in 2012. Part of me is thinking very much about a bird in the hand...

Very understandable. Just laying out that option.

I'd do option 3 then, after laying it all out in a spreadsheet to make sure I verified the breakeven #s, and including whatever return I'd get from having extra money on hand with closing costs rolled into the loan with #3.

 

[Animorph]

1 vs. 2: $74/month less for 2, but you owe roughly $3k more when you payoff the loan in 10 years. $8880 - $3000 saved over 10 years by selecting 2, with no IRR calc.

2 vs. 3: $66/month less for 3, but you owe roughly $4k more when you payoff the loan in 10 years. $7920 - $4000 saved over 10 years by selecting 3.

So I'd be happy with 3, for 10 years or longer.

Rolling stuff into a refi may be a PITA at tax time, if you are able to deduct it. You will only be able to deduct the interest on the original principal. That requires figuring out what interest was due to that original amount and what was paid for the extra added principal. On top of any issues with points.

 

[nash031]

Any chance you have a service connected disability? I believe the VA funding fees go away if you have even a 10%..however it's my understanding the paperwork for the disability has to be filed before you do a refi..not approved but filed.

Might not help you but could help another.

Thanks. This is worth my time to look in to since I'll be submitting my VA claim in the next few months.

 

[RobbieB]

I'd go with #3

 

[Goldendoodlebug]

Another option is Navy Federal for your mortgage. We saved quite a bit by going through them for our VA refi. Less cost for the loan and the mortgage was lower. We have a 15yr @3.5. Refi was in May.
I will say we used them several yrs ago and they were easy to work with, they weren’t so easy this time, but worth it to us. We don’t have a branch near us which complicated it a bit, I’m sure there is a Navy Federal in San Diego

 

[aja8888]

Put my vote in for Door #3.

 

[Bigdawg]

Door #5: Fed should cut rate sometime soon. Navy Fed current 15yr VA at 3%. 30 yr @ 3.125? Or is it 3.25? Anyway. I think you can do better than what they are offering. Other than that I would go option #3. Good luck.

 

[pb4uski]

.... The mortgage agent "likes" option 2 the best. His reasoning is the balance of the 26-month break even alongside the 3.625% rate is the best alternative. Based on VA rules, the earliest we could consider a re-fi is if rates go down by 0.5% after six months. Versus option 3, where he seems to believe we'd be locked into that loan by paying the higher expenses up front (into the loan), with fewer options on the table until 40 months.

I believe that he is pushing that option vs. option 3 because it opens future doors for another re-fi down the road, wherein he can make additional money on transaction costs. ...

I had the exact same thought. I like door #3.

 

[nash031]

Door #5: Fed should cut rate sometime soon. Navy Fed current 15yr VA at 3%. 30 yr @ 3.125? Or is it 3.25? Anyway. I think you can do better than what they are offering. Other than that I would go option #3. Good luck.

Thanks! Back at the time of original purchase, I checked against Navy Fed, USAA, another mortgage lender common with military (whose name escapes me) and Rocket, and these guys were the lowest. Doesn't mean I can't do better, but I might bide my time, particularly with a VA disability claim to be submitted in a few weeks. That would waive the VA funding fee altogether and make option 2 like option 1, and option 3 like option 2, potentially with lower rates.

 

[ivinsfan]

Thanks! Back at the time of original purchase, I checked against Navy Fed, USAA, another mortgage lender common with military (whose name escapes me) and Rocket, and these guys were the lowest. Doesn't mean I can't do better, but I might bide my time, particularly with a VA disability claim to be submitted in a few weeks. That would waive the VA funding fee altogether and make option 2 like option 1, and option 3 like option 2, potentially with lower rates.

Be certain of the funding fee issue.I'm recounting the experience of my BIL a Navy vet...

 

[nash031]

Be certain of the funding fee issue.I'm recounting the experience of my BIL a Navy vet...

According to what I'm reading on the VA site, if I am eligible for a 10% rating, I can get the fee waived. I will almost certainly have a 10% (likely much higher) rating. Of course, there's higher math now to determine if it's worth the risk to save the $3K folded into the loan if the rate doesn't stay this low. It probably is.

 

[ivinsfan]

According to what I'm reading on the VA site, if I am eligible for a 10% rating, I can get the fee waived. I will almost certainly have a 10% (likely much higher) rating. Of course, there's higher math now to determine if it's worth the risk to save the $3K folded into the loan if the rate doesn't stay this low. It probably is.

I'm of the opinion your broker should have asked you and/or told you about this option .I know many vets with service connected disabilities . The broker could have cost you 3K...

 

[markelp]

How about shop around and get a second (or third) offer? USAA or Navy Federal CU deal with VA loans daily.

A mortgage is a product.
A broker a sales person.

Shop around, especially on a product as expensive as buying a mortgage. You can always go back to your previous broker if you don't find something you like.

Also, I used to read the articles from this guy from some technical insight into the mortgage market when I was looking to buy one:

https://www.moving.com/mortgage/mortgage-market-commentary.asp

 

[nash031]

I'm of the opinion your broker should have asked you and/or told you about this option .I know many vets with service connected disabilities . The broker could have cost you 3K...

To be fair to him, he doesn't know I'm retiring. I'm not terribly up front about that with lenders right now due to the perception of changing income and the associated difficulty in obtaining financing.

 

[nash031]

I will definitely shop around a little bit as I did before. I didn't find better rates before, not sure I will now based on cursory research, but will contact at least PenFed and NFCU.

I do not intend to ever again use USAA for mortgages. You are dealing with a third party, not USAA, and the customer service is among the worst I have experienced. That said, I will bounce rates off of USAA for comparison, and in this case, since I have a place to live, maybe I'd use USAA again if it's significantly less expensive. I just bristle at USAA (or whomever they employ for mortgages) because they damn near made my wife and I homeless seven years ago by failing to meet closing timelines and not seeming to care much at all.

 

[markelp]

Good feedback on your experience with USAA. I had a similar problem with Chase mortgages and vowed to never use them again. A local bank helped us out by quickly approving our mortgage and I moved our checking/savings to them for the last five years as a result. There are lots of fish in the sea and financial institutions that provide the best products and customer service will get my business.

Good luck on your mortgage purchase!

 

[ivinsfan]

To be fair to him, he doesn't know I'm retiring. I'm not terribly up front about that with lenders right now due to the perception of changing income and the associated difficulty in obtaining financing.

you DW will continue to work and you have a government pension, you shouldn't have a problem.

 

[OldShooter]

How about shop around and get a second (or third) offer? USAA or Navy Federal CU deal with VA loans daily.

A mortgage is a product.
A broker a sales person.

Shop around, especially on a product as expensive as buying a mortgage. You can always go back to your previous broker if you don't find something you like. ...

This.

... The mortgage agent "likes" option 2 the best. His reasoning is that ...

... he and/or his company makes the most money from your choosing this option.