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Choosing a mortgage rate?
Old 12-04-2020, 02:03 PM   #1
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Choosing a mortgage rate?

Ok, so we are buying a house, with a conforming 30 year fixed loan for the full amount allowed in our area: $756,600. I really wanted to do a jumbo for about $1.4m given how low rates are but pandemic+visa issues for my wife meant her income this year was messed up. I expect to carry to mortgage past the point where we are FI again, and probably past our RE point.

The mortgage broker can get us 2.5%, or we can get 2.75% with a $7700 credit towards our closing costs. After thinking about it, since both loans are for the full amount, it's logically just the offer they made before of 2.75% or we can pay $7700 for a 2.5% rate.

Mortgage broker says it will take 9 years to break even (online calculators roughly agree), then the 2.5% rate pulls ahead, but this is ignoring investment returns, and since all money is fungible, thereturn on me keeping the $7700 invested in VTSAX. Also since it is a fixed rate mortgage, the payment is shrinking in real cost over time due to inflation.

I'm trying to build a spreadsheet to model it, but need to decide this afternoon and have work and errands I have to get done too. :P My gut feeling is that buying the lower rate (even if it is couched as getting paid to take the higher rate) is probably not right unless we end up in an extremely low rate of return environment for the long haul which pundits keep predicting but has not happened as of yet... Does anybody happen to have a google sheet that already has this modeled so I can actually build a good comparison? Or know this decision well enough that it is obvious which one is a better decision (seems dependent on rate of return and inflation assumptions off the top of my head).

At least I know that given the non-obviousness of the decision it probably is close enough financially that it really doesn't matter in light of our resources and income. But still, I'd prefer to "get it right". :P
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Old 12-04-2020, 04:37 PM   #2
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I'm looking at it this way... based on a $756,600 loan and 30 year term the monthly payments at 2.5% would be $2,989/month and at 2.75% would be $3,089/month, so the 2.5% mortgage has a $99/month lower payment.

The PV of $99/month at a 7% discount rate for 8.6 years would be $7,700, so assuming that 7% is a reasonable hurdle rate and you expect to stay in the house more than 8.6 years then go for the lower rate.... make sense?
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Old 12-04-2020, 05:12 PM   #3
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Yeah, that makes sense, thanks. We're hoping to stay indefinitely, my wife wanted to buy a place so she can feel like she is putting down roots. It's the first time we've bought a house, heck first time I've ever carried debt, so I've been feeling a bit unsure about what I'm not taking into account.
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Old 12-05-2020, 06:53 PM   #4
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With $7,700 in closing costs Iím guessing youíre paying up to one point to get your low rate. While youíre right to compare the rates available now to determine a break even time, thereís also a possibility that rates may go lower in the next few years and youíll want to refi. For that reason I personally like to keep total closing costs as low as possible. I realize it sounds bizarre to think rates could go even lower, but thatís been true for 20 years and indeed they have.
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Old 12-08-2020, 01:08 AM   #5
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Ended up modeling all the rates they gave me here:
https://docs.google.com/spreadsheets...it?usp=sharing
My super simplistic model (fixed inflation, non-variable returns) doesn't take into account taxes on the investment returns, nor the investment returns of the income stream the lower rates represent, which means the gaps actually get smaller for most of the lower rate cases. I also decided that getting the credits for taking a higher rate were looking fairly marginal as well. I ended up deciding that it was basically not worth worrying about as there are benefits to both. Meanwhile the not closing the quote on Friday and getting it today instead meant the zero cost/credit option was 2.56% instead if 2.599% so yay.
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