Refinance giddiness

[nomadgecko]

I need to geek out.

We bought our (first) home in August 2009 with a 30 year fixed at 5.25%. Not bad, not great. If I kept that loan and paid off on schedule, I would have paid back $1.99 for every $1.00 borrowed. And after the first 18 months, only $0.22 of every $1.00 I paid to the bank went to principal. Ugh. Fortunately rates were dropping, which brought us into Mortgage #2.

In Jan 2011 we refinanced into a 20 year fixed at 4.25%. Ok, my monthly payments went up by $200, but I thought of it as a 401(k) - if I chip in an extra $200/month, the bank will match that and "contribute" an additional $200/month to principal. Now $0.43 of every $1.00 I pay the bank goes to principal, roughly double where I was. Total interest over the life of the loan was cut in half, and our target date of ownership came in about 8 years. Nice, we moved the needle. For the past couple of years we've paid on schedule, until now.

Yesterday we signed the paperwork to refinance into a 15 year fixed at 2.75%. Giddyup!!! Our monthly payment is going up $10, but now $0.66 of every $1.00 I pay is going to principal. Total interest is getting cut in half again.

Our date of ownership came in another 3 years, we're paying many,many tens of thousands of dollars less in interest over the life of the loan versus the previous, our equity is growing faster should we sell the house...what's not to love?

I'm psyched.

[BudgetForWealth]

Very nice! May I ask which company you used to do the refi?

I can't afford the monthly payments of a 15 year loan, so for now I'm just making extra principal payments monthly to knock down the length of the loan.

[john94549]

Might I suggest a nice "thanks for your help" note to your loan officer. With a copy to his or her supervisor (or somebody up the chain). Make somebody's day/week/month.

[MnD]

Nice!

We are closing Friday on a 2.74% fixed-rate 5-year zero-cost refi on a low balance ~$67.5K.
It's actually a first lien home equity loan (from our regular branch bank).
Applied 11 days ago in less than 10 minutes with just a signature and sent them an email later that day with a PDF our of homeowners insurance declaration.
Closing is on Friday and is supposed to take 10 minutes.
They got all the qualification info from our credit report, looking at our bank account deposits to verify income and a Zillow-like desktop appraisal service.

Easiest refi ever! Payoff in Feb 2018 with $4,806 paid in cumulative interest.
Can't imagine that's too profitable for them but I guess when they are paying nothing or next to nothing on deposits, 2.74% looks pretty good.

[nomadgecko]

Very nice! May I ask which company you used to do the refi?

Wells Fargo

Might I suggest a nice "thanks for your help" note to your loan officer. With a copy to his or her supervisor

Nice idea. I'll do that once everything is finalized.

[icefr]

Awesome!!! If you consider refinancing again and you plan on paying it off within 5 years, you could also consider a 5/1 ARM.

[Calm Man]

If you borrow less you will pay less interest. If you borrow nothing you will pay no interest. If you can afford the extra principal maybe you don't need as big a loan? I do not believe in taking any loans including a mortgage. But if you do, obviously you save interest if you pay off more principal.

[Honobob]

Time value of money concept? Just seems the banks are offering TOO little to get me to give them 2013 dollars for 2043 dollars.

[grabiner]

Time value of money concept? Just seems the banks are offering TOO little to get me to give them 2013 dollars for 2043 dollars.

The reason is that banks don't expect to have many 2043 dollars; few homeowners stay in their homes for 30 years without refinancing or paying the loan off early. In addition, there aren't that many 2043 dollars; the present value to the bank of your 2043 mortgage payment (even if you make it in 2043) is much less than the present value of your 2014 payments.

Therefore, 30-year mortgage rates have an expected duration of around 10 years, and thus tend to track the 10-year Treasury-bond rate, not the 30-year rate.

[BrandonBogle]

Congrats to the Op!!

In general, what's the thought about this when one is in the accumulation phase? I'm 30 with a 2.75% fixed for 28 more years. Plan to stay in the house for a long time (best school district where I want to live, great neighborhood, decently big house). I know life could change and you have to reevaluate at that point, but currently I would love my gf becoming why wife in this house and we raise a family here. Regardless of the emotional reasons though, if one is planning to be the house for years to come, would you accelerate the payoff of a loan with such a low rate? My mortgage is 20% of my tax home after taxes, 401k, and insurance.

[lindisfarne]

Congrats to the Op!!

In general, what's the thought about this when one is in the accumulation phase? I'm 30 with a 2.75% fixed for 28 more years. Plan to stay in the house for a long time (best school district where I want to live, great neighborhood, decently big house). I know life could change and you have to reevaluate at that point, but currently I would love my gf becoming why wife in this house and we raise a family here. Regardless of the emotional reasons though, if one is planning to be the house for years to come, would you accelerate the payoff of a loan with such a low rate? My mortgage is 20% of my tax home after taxes, 401k, and insurance.

I wouldn't. 2.75% is essentially cost of living, so in reality, you're paying essentially no interest, once the effect of itemizing it on Sch. A (*assuming you itemize). Of course, for some people "owning" is very important, but at your age, I'd invest the extra money. Of course, life & job can change, so that's something to think about (do you have good disability insurance?)

[BrandonBogle]

I wouldn't. 2.75% is essentially cost of living, so in reality, you're paying essentially no interest, once the effect of itemizing it on Sch. A (*assuming you itemize). Of course, for some people "owning" is very important, but at your age, I'd invest the extra money. Of course, life & job can change, so that's something to think about (do you have good disability insurance?)

Basically how I've felt so far. I've been paying down other debts and am almost finished, so thinking about just letting this and the 1.49% auto loan drag on for as long as it can. Currently, even with paying other debts, maxing out all tax-advantaged space.

Hopefully the above is another data point for people. If I was in the Op's shoes, I totally would have done the doubling of ROI he accomplished.

As for me specifically about disability insurance, I do not have my own long-term care, but do have employer provider short-term disability and long-term disability of 50% of pay until I'm 65. They offer additional LTC at an extra cost, but I haven't joined that. If this is something I should look into, let me know and I'll open a thread for it.

Thanks!

[grabiner]

In general, what's the thought about this when one is in the accumulation phase? I'm 30 with a 2.75% fixed for 28 more years. Plan to stay in the house for a long time (best school district where I want to live, great neighborhood, decently big house). I know life could change and you have to reevaluate at that point, but currently I would love my gf becoming why wife in this house and we raise a family here. Regardless of the emotional reasons though, if one is planning to be the house for years to come, would you accelerate the payoff of a loan with such a low rate? My mortgage is 20% of my tax home after taxes, 401k, and insurance.

I wouldn't pay it off at that low a rate; you can get better after-tax returns by investing in bonds in your 401(k) (Adniral shares of Long-Term Treasury yield 2.79%), or even in your taxable account (Admiral shares of Long-Term Tax-Exempt yield 2.11% and have a bit of credit risk but a shorter duration than the mortgage). You may choose another investment, but these are reasonable comparisons.

[BrandonBogle]

Thanks David and Lindis. More info here http://www.bogleheads.org/forum/viewtopic.php?f=1&t=110026

Finally got my bond holdings up and it will be next month before I can put back into the taxable account. But TLH helped me pay off the other debts!

[Default User BR]

If you borrow less you will pay less interest. If you borrow nothing you will pay no interest. If you can afford the extra principal maybe you don't need as big a loan? I do not believe in taking any loans including a mortgage. But if you do, obviously you save interest if you pay off more principal.

It's obvious that you save interest. It's not obvious that you save money.


Brian

[Default User BR]

In general, what's the thought about this when one is in the accumulation phase? I'm 30 with a 2.75% fixed for 28 more years. Plan to stay in the house for a long time (best school district where I want to live, great neighborhood, decently big house). I know life could change and you have to reevaluate at that point, but currently I would love my gf becoming why wife in this house and we raise a family here. Regardless of the emotional reasons though, if one is planning to be the house for years to come, would you accelerate the payoff of a loan with such a low rate? My mortgage is 20% of my tax home after taxes, 401k, and insurance.

I would not accelerate that excellent loan, especially if you are able to deduct some or all of the interest. Your expected (although not guaranteed) return from investing is going to be higher. In addition, you gain inexpensive hedging against future rate and inflation increases.


Brian

[boknows]

The 30yr refi rate at my CU has held at 3.25% for 2 months now, and just as we're getting the paperwork going, I've seen it go to 3.375, then 3.5 in the last 2 days. UGHHHH

[letsgobobby]

i agree with the giddiness.

Now I'm on the opposite side. I'm 1 year into a 15 year fixed 2.875, but thinking of refinancing into a 30 year. We may need to carry two homes for a while in about two years and could use the cash flow. Rates are still very low compared to history. Does anyone think this is totally crazy?

[Honobob]

Time value of money concept? Just seems the banks are offering TOO little to get me to give them 2013 dollars for 2043 dollars.

The reason is that banks don't expect to have many 2043 dollars; few homeowners stay in their homes for 30 years without refinancing or paying the loan off early. In addition, there aren't that many 2043 dollars; the present value to the bank of your 2043 mortgage payment (even if you make it in 2043) is much less than the present value of your 2014 payments.

Therefore, 30-year mortgage rates have an expected duration of around 10 years, and thus tend to track the 10-year Treasury-bond rate, not the 30-year rate.

And yet, so few take out a ten year amortized over 30 with a baloon payment to SAVE INTEREST! Why?

[hand]

Time value of money concept? Just seems the banks are offering TOO little to get me to give them 2013 dollars for 2043 dollars.

The reason is that banks don't expect to have many 2043 dollars; few homeowners stay in their homes for 30 years without refinancing or paying the loan off early. In addition, there aren't that many 2043 dollars; the present value to the bank of your 2043 mortgage payment (even if you make it in 2043) is much less than the present value of your 2014 payments.

Therefore, 30-year mortgage rates have an expected duration of around 10 years, and thus tend to track the 10-year Treasury-bond rate, not the 30-year rate.

And yet, so few take out a ten year amortized over 30 with a baloon payment to SAVE INTEREST! Why?

1) Because buyers / borrowers tend to overestimate their length of stay in a house
2) Because anything other than a 30 year fixed mortgage is too complicated for the average buyer - and ARMs / balloon payments have been given a pretty bad name over the last couple years
3) Because many folks (myself included) are willing to pay a bit more today to reduce future risk
4) Because many folks (myself included) believe that borrowing money locked at today's rates for 30 years will be looking pretty smart in years 10-30.

[Diver]

The 30yr refi rate at my CU has held at 3.25% for 2 months now, and just as we're getting the paperwork going, I've seen it go to 3.375, then 3.5 in the last 2 days. UGHHHH

i started refi process with AmeriSave on 1/23 and I'm closing Monday 2/18. i locked 3.25% for 30y fixed and was stressing out when the lock end date was approaching and the rates were going up. my last day to close is 2/19 and there was big delay getting tax certs to AmeriSave and it looked iffy for a while.

i was surprised to get 3.25 APY rate with 3.29 APR - it seemed that prevailing rates were a bit higher. i'm pretty happy that i locked it!