Mulling a refi

[Weebit]

Hi there!

I’m a frequent lurker; very rare poster. I really appreciate the thoughtful responses the community gives, so let me say thanks for everything you’ve given me to think about over the past few years.

I currently have two questions on mortgages.

Facts: We have a 15 year mortgage with 14 years remaining on it at fixed rate 3.875%. The mortgage amount is $625,895. We intend to stay in the house for at least another 10 years – probably longer. I’m 57; my husband is 49. I have a “stable” job with the state; my husband is in biotechnology (lucratize, but volatile.) I am hoping to retire in 10-12 years. We have emergency savings. Our P&I is ~$4700; we pay $5000 monthly.

When rates dipped about 8 weeks ago, we contacted our mortgage broker; they didn’t have anything good for us then, but recently got back in touch and said they could get us a 15-year mortgage at 2.875%. The closing costs for this will be $4763.

I’m torn as to whether or not this is a good idea. We’d be saving $300 a month in interest, but we’re paying $4763 for that. That would take 16 months to pay off. Given that we do intend to stay here a while (our house has appreciated considerably since we bought it in 2007, maintained its value during the 2008 crash, and we love the neighborhood and the house) it seems like a good idea to get the lower rate, but it also feels like we “lose” the year that we’ve been paying on this mortgage.

Second, given the COVID situation, it would seem smart to imagine what life might be like if bad luck visits us and we have only one income rather than two. Under that line of thinking, I was actually considering moving BACK into a 30 year mortgage but paying double on it. It seems over time I’ve seen people argue back and forth as to whether having a 30-year mortgage but paying extra works out the same over the long run (well, “long” as in 15 years) as having a 15-year mortgage.

Any thoughts on these two decisions (which are really just one decision, I guess!)?

Thanks much.

 

[Aerides]

It's probably a good idea (and even if it takes a year to break even, since you plan to stay in the house for far longer) but you might want to wait a few months if you're not sure? Rates aren't going to go back up in the near term. Saving 1% on a mortgage is going to add up, but perhaps the deal could get a little sweeter?

And yes maybe get a quote on the 30 year if that flexibility would give you more comfort if the road gets bumpier, can't hurt to ask. It really depends on if you have the discipline to pay it like it's a 15 reliably.

 

[statsman]

It's probably a good idea (and even if it takes a year to break even, since you plan to stay in the house for far longer) but you might want to wait a few months if you're not sure? Rates aren't going to go back up in the near term. Saving 1% on a mortgage is going to add up, but perhaps the deal could get a little sweeter?

Sounds like the OP is being offered 0.75 pts plus fees for a refinance. Might be a bit high in what is lean times for lenders making loans, albeit a risky time.

Back in 2013, we went from a 30 year 5.625% loan (15 years paid off) to a 15 year 2.625% loan. Effectively, 3% less for the remainder of our original 30 year loan. Our credit union offered us this as a rate modification to our loan for 0.25 pts plus a few fees. It took us less than two months to recoup the costs (factoring in deductions).

 

[OldShooter]

... I’m torn as to whether or not this is a good idea. ... Second, given the COVID situation, it would seem smart to imagine what life might be like if bad luck visits us and we have only one income rather than two. Under that line of thinking, I was actually considering moving BACK into a 30 year mortgage but paying double on it. ... Any thoughts on these two decisions? ...

Yes, thoughts: What problem are you trying to solve? Start there. Lower payments? Faster payoff? More security against bad luck? If you don't know where you're going, any road will get you there.

... it also feels like we “lose” the year that we’ve been paying on this mortgage.

That is sunk cost. Always ignore sunk cost when making a financial decision. https://en.wikipedia.org/wiki/Sunk_cost

 

[CardsFan]

That is sunk cost. Always ignore sunk cost when making a financial decision. https://en.wikipedia.org/wiki/Sunk_cost

Sunk Costs. Engineering Economics 101.

Probably one of the most useful concepts that most people ignore.

 

[troutnut1]

$4763 in closing costs almost sounds like too little on that size of mortgage. 3/4% total closing costs?

We might be better able to help if you were to list all of them individually. Some may be prepaid interest or insurance depending upon the closing date. Others might be “junk fees” that are negotiable.

Also don’t forget to consider that your new loan payment will be based upon a 15 year amortization, while you old loan only has 14 years left. You could always calculate a 14 year amortization payment in order to make a more apples to apples comparison. And you could send in extra each month to keep the same final payment date if you wanted to.

 

[The Cosmic Avenger]

Also don’t forget to consider that your new loan payment will be based upon a 15 year amortization, while you old loan only has 14 years left. You could always calculate a 14 year amortization payment in order to make a more apples to apples comparison. And you could send in extra each month to keep the same final payment date if you wanted to.

That's what we did, we refinanced to an ARM (5/1, I think?), and did our own reamortization calculation to pay it off by our target date (before we had to start paying tuition, so our money could go towards that instead). We still wound up paying less, but we also paid a lot more than our "statements" said we should.

 

[SnowballCamper]

Weebit, Do you have other assets (excluding IRA/401k)? that you could apply to a 15yr payment in an emergency (for a year or more)? Then take the 15yr refinance at 2.875%

If you don't have any other way to make the 15yr payment in the event of job loss, then the 30 year is a good way to get the flexibility, until you save enough.

 

[RenoJay]

I always think it makes sense to deal with multiple mortgage brokers at once. They’ll often reduce fees when they realize they’re in competition. You can potentially cut down the payback time significantly if you play a little bit of hardball today.

 

[Travelfreek]

Do you have a good 401k/457b also? If so, that could be a back up
Plan once you reach 59 1/2 if your husband loses job. What is the APR on this new 15 year note? Also with the $4700 in closing, how much of that is tax + insurance - part of normal impounds? Seems like you stand to save a lot to get the 15 year. I agree if you shop the rate you can get the best deal! We did that once and went with Costco Mortgage. The other lender suddenly was willing to match Costco mortgage lender terms. I told him to go fly a kite!

 

[jazz4cash]

$4763 in closing costs almost sounds like too little on that size of mortgage. 3/4% total closing costs?



We might be better able to help if you were to list all of them individually. Some may be prepaid interest or insurance depending upon the closing date. Others might be “junk fees” that are negotiable.



Also don’t forget to consider that your new loan payment will be based upon a 15 year amortization, while you old loan only has 14 years left. You could always calculate a 14 year amortization payment in order to make a more apples to apples comparison. And you could send in extra each month to keep the same final payment date if you wanted to.

+1
I’m running a similar evaluation. I generally compare the APR to my current rate to account for most if not all closing costs and exclude the sunk cost. I expect rates will be crazy low at some point and that’s where I might refi at 30 yrs. lm looking for generational low rates. The best 15 yr rates I’ve seen are 2.62/2.92 apr.

 

[Sunset]

OP - As some others have suggested, I'd check out the quotes from some other broker, especially costco if you are a member. I have no idea how your broker is paid, and whether some of your broker earnings are pulled back if you refi the original mortgage.
It does not hurt to double check you are being treated honestly.

As for the 30 vs 15 yr mortgage, as long as you can lump sum down money at times without penalty and it counts towards the principle, then that is what I have done in the past, to maintain flexibility while discharging a mortgage fast.

 

[Done]

I’m also considering a refi. For comparison, my broker is offering a 15-year fixed at 2.75% for zero net cost (where the credit covers the fees) or a 30-year at 3.0% for zero net cost. Rates are even lower if I pay fees. Shop around some more.

 

[DrRoy]

Run your payback on an after tax basis to see if you are still happy with it.

 

[Weebit]

$4763 in closing costs almost sounds like too little on that size of mortgage. 3/4% total closing costs?

We might be better able to help if you were to list all of them individually. Some may be prepaid interest or insurance depending upon the closing date. Others might be “junk fees” that are negotiable.

Also don’t forget to consider that your new loan payment will be based upon a 15 year amortization, while you old loan only has 14 years left. You could always calculate a 14 year amortization payment in order to make a more apples to apples comparison. And you could send in extra each month to keep the same final payment date if you wanted to.

The fees are all closing costs, not prepaids. They are:
Origination fee: $0
Loan discount pts: $0
Processing fee: $675
Appraisal fee: $750
Tax service fee: $100
Underwriting fee: $675
Title services & title insurance: $2332.92
Recording fees: $230

The pre-paids are an additional $4760.73, but my understanding is that these are payments the mortgage broker takes to ensure everything is paid up (real estate taxes, home insurance, and per diem interest payments) and then refunds what is not needed back to you once everything settles. So my understanding (which could be wrong) is that these are ultimately a wash.

RE: What problem am I trying to solve. Excellent question. Will think on that.

RE: Sunk costs! YES. I know that well. Just can't see it when it's my own sunk costs. Will work on that.

RE: 457/403B - yep - got lots of funds there that could be used in an emergency, but I REALLY don't even like to think like that.

RE: shopping around. Excellent advice. Will do a bit of that!

One more question: APR - that shows what the effective rate is given the fees over the cost of the loan? Is that correct? Hence, turns all fruits into apples that can be compared?

Thanks, everyone!
Weebit

 

[Sunset]

Perhaps others can chime in here as I've never had a mortgage in the USA.

Why on a refi would a person need to pay: Title services & title insurance: $2332.92 ?

Since it's the same house, and no change in ownership is being done.

 

[troutnut1]

The fees are all closing costs, not prepaids. They are:
Origination fee: $0
Loan discount pts: $0
Processing fee: $675
Appraisal fee: $750
Tax service fee: $100
Underwriting fee: $675
Title services & title insurance: $2332.92
Recording fees: $230

The pre-paids are an additional $4760.73, but my understanding is that these are payments the mortgage broker takes to ensure everything is paid up (real estate taxes, home insurance, and per diem interest payments) and then refunds what is not needed back to you once everything settles. So my understanding (which could be wrong) is that these are ultimately a wash.

RE: What problem am I trying to solve. Excellent question. Will think on that.

RE: Sunk costs! YES. I know that well. Just can't see it when it's my own sunk costs. Will work on that.

RE: 457/403B - yep - got lots of funds there that could be used in an emergency, but I REALLY don't even like to think like that.

RE: shopping around. Excellent advice. Will do a bit of that!

One more question: APR - that shows what the effective rate is given the fees over the cost of the loan? Is that correct? Hence, turns all fruits into apples that can be compared?

Thanks, everyone!
Weebit

Of course lenders and loan officers or mortgage brokers need to make some profit or they would be crazy to do this. That normally comes from the 1% origination fee which is normally split between the loan officer and company 50/50. When I was a loan officer we also got to split 50/50 any “made-up” or “garbage fees”. Like “processing fee” or “underwriting fee”. These are totally made-up fees, although not uncommon. And lenders and loan officers normally split any “overage” which are points in excess of what the market demands. (getting a borrower to pay 3% in points when the market would normally demand 2 would produce and overage of 1%). The title and title company fees are likely legit as the lender needs a policy of title insurance to insure their interest in the loan. Often if you go to the same title insurance company that did it just a year ago, they will give a discounted rate. Sometimes even a new company will give that discount. So check on that for a discounted “short-rate” policy.

When I see 0% origination and 0% points it tells me two things. 1. The lender expects to make your loan at a higher than market interest rate and sell the loan at a “premium” instead of at a “discount”. 2. They will (and have) made up other fees to enhance their revenue. But they will also get more than 100 cents on a dollar when they sell this loan. That’s not necessarily a bad thing, particularly if one wants to keep closing costs low because they want to shorten the time need to recover their closing costs with payment savings.

For instance, if I knew I would be job transferred in 5 years, I would probably take an adjustable rate loan with the lowest possible fees and costs. But if I knew for sure I would be there for 20 or 30 years, it might be better to pay more up front for a lower rate and a fixed rate.

Almost all lenders intend to sell these loans soon after closing. The “yield” demanded by investors looking to buy these loans changes constantly just as the stock market does. And loans are made at many different interest rates every day. Investors care about the yield, not the rate. A lower interest loan with higher points and fees up front may produce an equal yield to a higher rate loan they have to pay one hundred and two cents on the dollar to get (that is how no or low closing cost loans get made).

In other words “discount points paid, or premium points received, equate the yields, between mortgages of various rates and terms”.

Lenders make the same profit on loans made at different rates when the fees are considered. So they really don’t care. But if you have “inside information” like “I intend to be in this house forever” you are normally better off “buying down” the loan rate by paying higher up front “points” or fees. It will often take longer to break even, but the savings over the long term can be substantial. Conversely, if you know you won’t have the loan long, accept a higher rate in exchange for lower fees and a quicker break even point.

Hope this helps!