Is this refi worth it?

[cardude]

I posted up awhile back that I was considering a refi of my existing 5% ARM that is fixed for only another 6 years for a longer term fixed loan at 5% for 30 years. My possible problem is that I'm retired and have no W2 income-- just rentals and interest/dividend income and my wife's small W2 income. I didn't know if I could get approved basically. I called the Schwab Mortgage division since I have my major brokerage account with them and they are working on the loan and said it looks like something they can do.

The closing costs on this refi will be around 6K however, and now I can't decide if that's worth it. The way I'm thinking about it I'm paying 6K to lock in 400K (the loan amount) of 5% (cheap) money for 30 years. Does that mean interest rates will have to rise only 1.5% over the next 30 years for me to break even (400K X .015 = 6000)? Does it make sense to spend 6K to lock in 5% for 30 years? (or more realistically 15-20 years because we probably will not live here the full 30 years).

Or, I could just keep the existing loan and pay the thing off in 6 years and save the 6K, but then I need to keep an extra 400K or so around when the time comes and that restricts how I can invest the money and the possible return.

Thoughts?

*I don't want to pay the house off right now for various reasons so that's not an option.

**I'm thinking if I don't refi it now while my wife has some W2 income we may not qualify in the future since she only plans to work another year or so.

 

[MasterBlaster]

There are lots of mortgage loans available with very little or no closing costs. Do a search on something like "Mortgages with no closing costs" and you'll find many links.

- worth a look

 

[brewer12345]

I would look at the $6k as an insurance premium. You are paying up to ensure you are protected from rates spiking out beyond 6 years from now. Is it worth it? All depends on your views about rates and risk tolerance. I would spreadsheet the mortgage and see what rates have to do in order to make the 6k a good investment on a present value basis.

 

[REWahoo]

Or, I could just keep the existing loan and pay the thing off in 6 years and save the 6K, but then I need to keep an extra 400K or so around when the time comes and that restricts how I can invest the money and the possible return.

That's the route I would choose.

This will allow you to see what happens to rates when your ARM adjusts in 6 years and give you the option of continuing the loan if, for some unforseen reason, the rate doesn't go up significantly.

My experience has shown spending the $6k to refinance will only insure you'll move long before your planned 15-20 year point.

 

[cardude]

My experience has shown spending the $6k to refinance will only insure you'll move long before your planned 15-20 year point.

You're probably right about that. Maybe I'll just sit tight and see what happens in 6 years and save the 6K. Heck, in 6 years I'll have one in college and may want to downsize out of this big house anyway.