Should I Refinance?

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Should I Refinance?

Postby gjgarcia41 » Fri Jul 12, 2013 1:07 am

Hello all,

I know it really missed the boat on this one, but I am just barely starting to consider refinancing. I recently became the successor trustee to my father's estate, which means I am now a 23 year old new homeowner. There is a lot for me to learn about property management and mortgages, so bear with me. Here is my current situation:

Original loan amount: $120,000 (15 year fixed)
Original loan date 10/14/2004
Current interest rate: 5.625%
Original maturity date: 11/2009
Current principle balance: $62,825.49
Currently monthly payment: $988.48 ($690.75 principle / 297.73 interest every month)
Yearly property tax: $3800

Details on the house:

1200 square feet, 1 story, 3 bedroom, 1 bathroom single family home with adjacent 2 car garage. It is located on a main street in the San Gabriel Valley (Los Angeles) 1 block away from a major shopping center and a newly renovated community college. 2 blocks from a major freeway and public transportation station (LA Metro). About a 10 minute drive to downtown. Last appraisal taken in 2004 valued the house at $380,000. Since then, no major improvements have been made, and none are needed (except a new garage door). Roofing, flooring, air conditioning, and water pipes are fine. Given the current housing market, I'd guesstimate it to be valued around $350,000 today.

My financial situation:

I make 32k/yr and my credit score is above 700, no debt. I do not plan on moving until this place is paid off, and after that I plan on renting it out. I am currently living with a roommate and family member that pays $1000 a month, which basically covers my monthly mortgage payment. Property taxes and utilities come directly out of pocket. Given that my mortgage will be paid off in roughly 6 years by just paying the minimum, would you refinance if you were in my situation? My goal with a refinance would be to lock a lower rate, so more of my monthly payment would go to principle, thus allowing me to payoff my loan faster. I suppose the plan would be to refi to a 10 year fixed loan around 3.5-3.8%, which I am guessing the monthly payment would be around $650-$700. This way I would be able to make double payments with ease.

So far I been given estimates by Bank of America, Chase, and Wells Fargo. Each gives a similar plan mentioned above: 10 year fixed, 3.5-3.8%, with around $2,600 closing costs. With this plan, I'm figuring I would make up the costs in about 9-10 months. Every mortgage rep says its in my best interest to refi now, since rates are sure to rise once the fed starts tapering. However, one rep said I probably wouldn't benefit much since the PB is low and I'm getting close to payoff. He said that if I were to refinance most of my payments would be going to interest instead of principle, which I do not fully understand. Some please explain this to a political science major...

What should I do?! :oops:
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Re: Should I Refinance?

Postby Cigarman » Fri Jul 12, 2013 5:20 am

Refinancing may be an option but what BofA, Chase and Wells Fargo probably are not telling you is that typically your loan amount (under $100k) may be too small to refinance. You also said you did not understand the fact that most of your payments, if you refinance, are going to interest rather than principle. Here is what I suggest you do:

1. Run an Amortization schedule for the proposed new loan over 15 years. It will show interest and principal. Look at how much is interest in the first 2/3rds of the loan and that should explain why you are paying interest. Right now nearly 70% of your payment is going towards principal. That will change drastically if you refi.

2. Consult with a mortgage loan broker. Keep away from the banks if you can as their rates (and closing costs) are typically higher than a broker can get for you.

3. You have plenty of equity so even if you cant refi, don't sweat it. If you have it paid off in 6 years and the most of your money is going towards principal, the interest rate is irrelevant.

Good luck
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Re: Should I Refinance?

Postby G-Money » Fri Jul 12, 2013 8:12 am

Yes, you should refi. No, you should not go with any of the outfits you listed. With such a small balance, it will be hard to break even with $2,600 in closing costs. And the quoted rates don't seem competitive.

Common recommendations here are to check out a handful of lenders listed as "Upfront Mortgage Lenders" on the Mortgage Professor's website. http://www.mtgprofessor.com/. I've had success getting instantaneous quotes (without disclosing any personal information) from Amerisave, Aimloan, National Mortgage Alliance, Firstib, and PenFed.

For such a small loan balance, I think you're an excellent candidate for PenFed's 5/5 ARM. https://www.penfed.org/55-Adjustable-Ra ... WT.ac=1021 It has no closing costs. It is locked at 2.75% for the first 5 years, then can jump no more than 2% over the next 5 years. Since you're looking at 10 year mortgages, you should have it paid off by then (although it has a 30 year amortization if you don't make additional payments to principal).

The blended rate of 2.75% for 5 years plus 4.75% (the highest it can be 5 years from now), assuming an initial loan of $63,000 and 120 monthly payments of $615 is about 3.25%.

If you maintain your $1,000/month payment rate, you'd have the 5/5 loan paid off in about 69 months, and your average interest rate would be closer to 3.15%.

So using the PenFed 5/5 loan and paying it off in 10 years would result in less interest paid and no closing costs. That would be a substantial savings over the quotes you've gotten so far, and would save quite a bit in comparison to your current 5.625% rate.
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Re: Should I Refinance?

Postby JamesSFO » Fri Jul 12, 2013 8:57 am

G-Money wrote:Yes, you should refi. No, you should not go with any of the outfits you listed. With such a small balance, it will be hard to break even with $2,600 in closing costs. And the quoted rates don't seem competitive.

Common recommendations here are to check out a handful of lenders listed as "Upfront Mortgage Lenders" on the Mortgage Professor's website. http://www.mtgprofessor.com/. I've had success getting instantaneous quotes (without disclosing any personal information) from Amerisave, Aimloan, National Mortgage Alliance, Firstib, and PenFed.

For such a small loan balance, I think you're an excellent candidate for PenFed's 5/5 ARM. https://www.penfed.org/55-Adjustable-Ra ... WT.ac=1021 It has no closing costs. It is locked at 2.75% for the first 5 years, then can jump no more than 2% over the next 5 years. Since you're looking at 10 year mortgages, you should have it paid off by then (although it has a 30 year amortization if you don't make additional payments to principal).

The blended rate of 2.75% for 5 years plus 4.75% (the highest it can be 5 years from now), assuming an initial loan of $63,000 and 120 monthly payments of $615 is about 3.25%.

If you maintain your $1,000/month payment rate, you'd have the 5/5 loan paid off in about 69 months, and your average interest rate would be closer to 3.15%.

So using the PenFed 5/5 loan and paying it off in 10 years would result in less interest paid and no closing costs. That would be a substantial savings over the quotes you've gotten so far, and would save quite a bit in comparison to your current 5.625% rate.


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Re: Should I Refinance?

Postby Batousai » Fri Jul 12, 2013 9:01 am

G-Money wrote:Yes, you should refi. No, you should not go with any of the outfits you listed. With such a small balance, it will be hard to break even with $2,600 in closing costs. And the quoted rates don't seem competitive.

Common recommendations here are to check out a handful of lenders listed as "Upfront Mortgage Lenders" on the Mortgage Professor's website. http://www.mtgprofessor.com/. I've had success getting instantaneous quotes (without disclosing any personal information) from Amerisave, Aimloan, National Mortgage Alliance, Firstib, and PenFed.

For such a small loan balance, I think you're an excellent candidate for PenFed's 5/5 ARM. https://www.penfed.org/55-Adjustable-Ra ... WT.ac=1021 It has no closing costs. It is locked at 2.75% for the first 5 years, then can jump no more than 2% over the next 5 years. Since you're looking at 10 year mortgages, you should have it paid off by then (although it has a 30 year amortization if you don't make additional payments to principal).

The blended rate of 2.75% for 5 years plus 4.75% (the highest it can be 5 years from now), assuming an initial loan of $63,000 and 120 monthly payments of $615 is about 3.25%.

If you maintain your $1,000/month payment rate, you'd have the 5/5 loan paid off in about 69 months, and your average interest rate would be closer to 3.15%.

So using the PenFed 5/5 loan and paying it off in 10 years would result in less interest paid and no closing costs. That would be a substantial savings over the quotes you've gotten so far, and would save quite a bit in comparison to your current 5.625% rate.

Well said.
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Re: Should I Refinance?

Postby LadyGeek » Fri Jul 12, 2013 2:33 pm

This thread is now in the Personal Finance (Not Investing) forum (refinancing).
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Re: Should I Refinance?

Postby NoVa Lurker » Fri Jul 12, 2013 2:57 pm

G-Money wrote:Yes, you should refi. No, you should not go with any of the outfits you listed. With such a small balance, it will be hard to break even with $2,600 in closing costs. And the quoted rates don't seem competitive.

Common recommendations here are to check out a handful of lenders listed as "Upfront Mortgage Lenders" on the Mortgage Professor's website. http://www.mtgprofessor.com/. I've had success getting instantaneous quotes (without disclosing any personal information) from Amerisave, Aimloan, National Mortgage Alliance, Firstib, and PenFed.

For such a small loan balance, I think you're an excellent candidate for PenFed's 5/5 ARM. https://www.penfed.org/55-Adjustable-Ra ... WT.ac=1021 It has no closing costs. It is locked at 2.75% for the first 5 years, then can jump no more than 2% over the next 5 years. Since you're looking at 10 year mortgages, you should have it paid off by then (although it has a 30 year amortization if you don't make additional payments to principal).

The blended rate of 2.75% for 5 years plus 4.75% (the highest it can be 5 years from now), assuming an initial loan of $63,000 and 120 monthly payments of $615 is about 3.25%.

If you maintain your $1,000/month payment rate, you'd have the 5/5 loan paid off in about 69 months, and your average interest rate would be closer to 3.15%.

So using the PenFed 5/5 loan and paying it off in 10 years would result in less interest paid and no closing costs. That would be a substantial savings over the quotes you've gotten so far, and would save quite a bit in comparison to your current 5.625% rate.


I think this is exactly the right advice, as long as you have the discipline to maintain roughly the $1,000/month payment amount or a little higher.

Keep in mind that it is certainly possible that interest rates dip again. Nobody has a crystal ball on that. Don't beat yourself up if that happens. It still makes sense for you to refi now, since you don't know what will happen in the future, and the current rates at places like PenFed are much better than what you are paying.
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Re: Should I Refinance?

Postby Watty » Fri Jul 12, 2013 7:26 pm

I have the PenFed 5/5 ARM loan and I recall seeing somewhere in the paperwork that there is a minimum amount for the loan of maybe $80K, so be sure to look into that.

Most likely your best choice would be a 10 home equity loan with local credit union.


I am currently living with a roommate and family member that pays $1000 a month,....


A few things about that;

1) That could be taxable income to you that you could need to declare and pay taxes on. Don't assume that you can just ignore that since years from now you could get zinged for massive interest and penalties that would be a lot more than the taxes you would pay today.

2) You need to make sure that you have the right type of homeowners insurance since you are renting to these people. For example if one of the people renting accidently burns your house down with a candle, then your insurance might not cover you. If one of them slips and falls in a shower they might sue you and you might not be covered. Along with getting the right type of homeowners insurance that covers the renters, you should also get an Umbrella Policy for at least a million dollars, it should not be very expensive.
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Re: Should I Refinance?

Postby G-Money » Fri Jul 12, 2013 7:55 pm

Watty wrote:I have the PenFed 5/5 ARM loan and I recall seeing somewhere in the paperwork that there is a minimum amount for the loan of maybe $80K, so be sure to look into that.

Most likely your best choice would be a 10 home equity loan with local credit union.

My refi to the 5/5 in Feb 2012 was for less than $80k, but I suppose it's possie they changed the limits. Quickly scanning the fine print on the website, it looked like the minimum was $25,000. There is a 36 month prepayment penalty (you owe a prorated amount of the closing costs if you completely payoff the loan in less than 3 years), which wasn't in play when I refi'd to the 5/5.

But Watty's suggestion to check out home equity loans is a good one. Compare the ones you find to the blended rates for the 5/5 (assuming you are eligible for it), and go with the lowest rate.
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Re: Should I Refinance?

Postby gjgarcia41 » Sun Jul 14, 2013 8:01 pm

G-Money wrote:Yes, you should refi. No, you should not go with any of the outfits you listed. With such a small balance, it will be hard to break even with $2,600 in closing costs. And the quoted rates don't seem competitive.

Common recommendations here are to check out a handful of lenders listed as "Upfront Mortgage Lenders" on the Mortgage Professor's website. http://www.mtgprofessor.com/. I've had success getting instantaneous quotes (without disclosing any personal information) from Amerisave, Aimloan, National Mortgage Alliance, Firstib, and PenFed.

For such a small loan balance, I think you're an excellent candidate for PenFed's 5/5 ARM. https://www.penfed.org/55-Adjustable-Ra ... WT.ac=1021 It has no closing costs. It is locked at 2.75% for the first 5 years, then can jump no more than 2% over the next 5 years. Since you're looking at 10 year mortgages, you should have it paid off by then (although it has a 30 year amortization if you don't make additional payments to principal).

The blended rate of 2.75% for 5 years plus 4.75% (the highest it can be 5 years from now), assuming an initial loan of $63,000 and 120 monthly payments of $615 is about 3.25%.

If you maintain your $1,000/month payment rate, you'd have the 5/5 loan paid off in about 69 months, and your average interest rate would be closer to 3.15%.

So using the PenFed 5/5 loan and paying it off in 10 years would result in less interest paid and no closing costs. That would be a substantial savings over the quotes you've gotten so far, and would save quite a bit in comparison to your current 5.625% rate.


Wow, thanks a lot for this. I didn't even consider an ARM until now. And it is no-cost, which seems a little too good to be true to me...but apparently these no cost refi's are fairly common. The thought of a rate of 2.75% for 5 years is extremely attractive. I'd easily be able to make double payments if my monthly payment was $615. How would a loan like this amortize? Do any of you have experience with this PenFed 5/5 or something similar?
Watty wrote:A few things about that;

1) That could be taxable income to you that you could need to declare and pay taxes on. Don't assume that you can just ignore that since years from now you could get zinged for massive interest and penalties that would be a lot more than the taxes you would pay today.

2) You need to make sure that you have the right type of homeowners insurance since you are renting to these people. For example if one of the people renting accidently burns your house down with a candle, then your insurance might not cover you. If one of them slips and falls in a shower they might sue you and you might not be covered. Along with getting the right type of homeowners insurance that covers the renters, you should also get an Umbrella Policy for at least a million dollars, it should not be very expensive.
Yeah, shopping for new homeowners insurance is next on my list. I'll be sure to look into that. As for the taxes....what a another headache :?
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Re: Should I Refinance?

Postby G-Money » Sun Jul 14, 2013 9:06 pm

gjgarcia41 wrote:Wow, thanks a lot for this. I didn't even consider an ARM until now. And it is no-cost, which seems a little too good to be true to me...but apparently these no cost refi's are fairly common. The thought of a rate of 2.75% for 5 years is extremely attractive. I'd easily be able to make double payments if my monthly payment was $615. How would a loan like this amortize? Do any of you have experience with this PenFed 5/5 or something similar?

The 5/5 loan has a 30 year amortization. So the minimum payments would be very small (initially, probably around $255 for $63K starting at 2.75%). But you definitely don't want to be paying the minimum if you have an ARM, since you'd have interest rate risk in future years. So you'd need to pay extra towards principal (you can do this however often you want, but I'd recommend monthly for discipline purposes). When you make your payment, you simply specify how much more toward principal you're paying. Very simple, and probably similar to what you're already doing.

I believe that ARMs reamortize at the end of each locked period. So, after 5 years, I believe the loan will reamortize based on whatever balance you have left over 25 years. So the minimum payment could rise or fall depending on how much extra principal you've paid down and what the new interest rate is. But if you're trying to pay it off in 10 years, you'll be paying so much more than the minimum that this won't matter. Note that I don't have any experience with reamortization. Hopefully someone will correct me if I'm wrong about this.

I refi'd to the 5/5 ARM back in Feb 2012. I made an additional payment to principal online, and it was extremely easy. I only kept the loan for 3 months (not a typo) before refi'ing to PenFed's 5 year HEL, then at 1.99% (there would be some substantial prepayment penalties for refi'ing the 5/5 loan so soon now). But PenFed's HEL rate isn't competitive with the 5/5 at this point. It's also 2.75% for 5 years, but with it has a 5 year amortization, so you'd give up a lot in liquidity and optionality (not worth it IMO; I saved over 1% going from the 5/5 to the 5 year HEL).

Some folks have found the application process to be slow at PenFed, but with interest rates rising a bit, I wouldn't be shocked if the volume of applications has dropped. I closed both refis with PenFed within 4-6 weeks, so I have no complaints.

Good luck.
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Re: Should I Refinance?

Postby MathWizard » Mon Jul 15, 2013 2:27 pm

A local credit union did a no-cost 7 year HEL at 3.875% for me last Dec with a principal balance of $45K\.
There was no minimum time to avoid a prepayment penalty. I could pay it off the next day. (I asked.)
If you coudl get something close to that, it would seem a great fit for you.

The breakeven on a 2.875% 15 year fixed with $1600 closing costs was not that great, so I went with the HEL
which was immediately cheaper, and I leaves me the option of paying off early.
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Re: Should I Refinance?

Postby G-Money » Mon Jul 15, 2013 2:45 pm

MathWizard wrote:A local credit union did a no-cost 7 year HEL at 3.875% for me last Dec with a principal balance of $45K\.
There was no minimum time to avoid a prepayment penalty. I could pay it off the next day. (I asked.)
If you coudl get something close to that, it would seem a great fit for you.

The breakeven on a 2.875% 15 year fixed with $1600 closing costs was not that great, so I went with the HEL
which was immediately cheaper, and I leaves me the option of paying off early.

That strikes me as a high price to pay to avoid the prepayment penalty. If you can force yourself to wait 3 years to pay off the loan, looks like you'd save money with PenFed's 5/5 ARM, too. You could dump the excess money in a CD or short-term bond fund, or just pay down your principal most of the way, leaving just enough in your mortgage that you can make minimum payments (based on a 30-year amortization) until it will be paid off in full 3 years + 1 day from the date of closing.

With a 7 year pay-off, starting the first 5 years at 2.75%, and assuming rates jumped the max (to 4.75%) for years 6 and 7, your blended rate would be right around 3.00%, with no closing costs. Pay it off sooner, or if rates don't jump that high, and your average rate would be even lower. Perhaps not worth the time and paperwork if it's too small a balance, but at least worth considering.
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Re: Should I Refinance?

Postby FNK » Mon Jul 15, 2013 4:07 pm

You might also consider refinancing into a line of credit (HELOC). You can get a rate that's lower than prime (say, 2.5%) for life.

Big flexibility: you can pull money in and out as needed, so you if you have money in excess of your emergency fund, you can pay the line down while maintaining liquidity.

Big risk: the rate will adjust the moment the Fed increases theirs. Not any time soon, but still.
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Re: Should I Refinance?

Postby Meg77 » Mon Jul 15, 2013 4:20 pm

I am a banker who also used to originate conventional mortgages and based on your stated goal of paying the loan off faster, I would NOT recommend that you refinance. If you really need to lower your minimum loan payment due to a possible cash flow cruch then refinancing would be a good choice, but in that case it would take LONGER to pay off the loan, even at a lower interest rate. The thing about mortgages is that at the beginning more of the payment goes to interest than to principal, so when you refinance and start the amortization schedule over again, even with a lower rate more of the payment is going to go to interest. The shorter the loan term, the less interest rate matters - just like when investments compound it's only over long stretches that you see a big difference.

CURRENT LOAN
I did an amortization schedule on the loan that you have and verified all the numbers you gave. The current loan is a 15 year fixed mortgage that will be paid off Oct 31 2019 (or whenever right before your nov 2019 payment would be due). If you keep this loan, from now until the loan is paid off, you will pay another $74,134 in total payments. Only $11,752 of that will go to interest - the remaining $62,384 will just go to pay down the loan principal.

10 YEAR FIXED REFI
If you refinance to a 10 year fixed loan at 3.6% then your monthly payment would be $633.29 (I assume a starting balance of $64,043 in Sept 2013 - projected/lowered principal in 60 days when closing would be plus $2600 in closing costs). If you kept making your $988 payment then you'd make a total of 74 more payments that total $73,144 in payments - almost the exact same deal you have now. You'd save $1000 over the next 6 years.

Edited to back out any assumed closing costs:
PENFED 5 YEAR ARM REFI
If you refinance into the 5 year PenFed Arm with zero closing costs, your monthly payment would be $250.84 (assumes starting balance of $61,443 in 2 months, when closing would probably be). If you keep making your $988 payment, you will make $69,192 in total payments instead (two more on the current mortgage plus 68 in total on the new PenFed mortgage). The new loan would pay off in May 2019 - as opposed to October 31 2019 as is currently scheduled. Your savings of roughly $5K in interest amount to the 5 months of payments you'd save by paying it off earlier. (I assumed the beginning rate of 2.75% through the life of the loan even though after 5 years the last 8 months would likely be at the 4.75% rate and cause another month of payments; the additional interest is likely minimal though and I didn't want to bother constructing a separate ARM amort with multiple rates).

If I bothered to back out inflation and the tax advantages you'd lose too by refinancing (interest is tax deductible), you are likely really not looking at much of a difference at all even with the PenFed option. In your case, refinancing is just not going to pay this loan off very much faster, even if you keep making your current payment after refinancing instead of paying your new lower minimum. All you're going to accomplish is paying nearly 4% of the loan in closing costs and making your life a lot more complicated for about 60 days while you participate in the mind numbing mortgage industry circus that is trying to get a loan refinanced. Then you have to maintain discipline to pay extra on the loan for years. The result will be the same. You'll have the loan paid off in about 6 years. Over that time a lot could happen anyway - you could get married or move for another reason and make it a rental sooner than you think. You're already getting the mortgage paid for by rent. I say sit tight at keep the good deal you've got now.

[By the way, I am wondering if you even qualify to refinance. You say "I recently became the successor trustee to my father's estate." Is the deed to the home in your personal name, or is it still under your dad or his estate? If you don't directly and personally own the house, then refinancing may not be possible, at least with a conventional standard loan with rates like the ones you have been quoted.]
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Re: Should I Refinance?

Postby G-Money » Mon Jul 15, 2013 7:26 pm

Meg77,

For a savings of about $5,000, I'd think a no closing cost refi with PenFed would be worth the trouble. Even after taxes, that's pretty significant for what (at least in my case) amounts to only an hour or so of work.
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Re: Should I Refinance?

Postby Lacrocious » Mon Jul 15, 2013 11:35 pm

I will let others help you determine if the PenFed 5/5 ARM is right for you, but we just closed last Wednesday, and the loan funded today (3rd business day). we received the 2.5%, no closing cost 5/5 ARM - it is right for us.

There is a 3 year, prorated monthly, payback of closing costs if you payoff the loan (or refinance) within 3 years. Not a penalty, really - they expect to recoup the closing costs that they cover via interest, and if you pay it off too soon, they don't recoup the cost. We have no issues with this. We are staying in the house for at least 3 years (youngest will be a sophomore in high school this year) - so that gets us past the repayment date. Closing costs were about $1400 - so we can calculate what it will cost if we ever do want to pay it off early.

The refinance went very smoothly. The biggest hold-up was my town not responding to the title company to check for leans, etc. The rest went very smoothly. The loan processor at PenFed kept me up-to-date with processes via email, but was available for me to call with a direct number at any time. I did that a few times when it was easier to discuss status rather than trade 20 emails of questions back and forth. We applied in late May and closed July 10th. They were shooting for a mid-June closing, but my town blew that. We didn't care that much - a few days more of the higher interest wasn't enough to get worked up about, and it wasn't PenFed's fault in any way.

The best part of the closing was that it was done at our kitchen table. They sent a title company representative to our house to close. We are half-way across the country from where PenFed is located. I have to say it was an easy experience.

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Re: Should I Refinance?

Postby G-Money » Tue Jul 16, 2013 5:34 am

Running the numbers through an amortization calculator, I think the savings would actually be greater for be OP than the $5,000 Meg77 projected. If rates jumped to the max of 4.75% after month 60, and if OP continued paying $988 per month, I calculate a savings of approximately $5,800. If rates don't jump that high, savings could be as high as $6,000. I've done a handful of no closing cost refis to save less than that. That amount of savings is equivalent to moving $100,000 from Morgan Stanley/Edward Jones/name-your-too-expensive-broker-or-fund-company to Vanguard and reducing your average ER from 1.20% to 0.20%.

Meg77's point about discipline in maintaining the current payment rate is well taken. On the other hand, you MUST make the $988/month payment now; that's the minimum. A refinance to the 5/5 ARM would at least give you some flexibility in the event life happens. While paying less than $988/month would mean you wouldn't save as much as the projections above show, you'd at least get to keep your house, which would not be the case if you paid less than $988/month now.
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Re: Should I Refinance?

Postby gjgarcia41 » Wed Jul 17, 2013 1:26 am

Meg77 wrote:I am a banker who also used to originate conventional mortgages and based on your stated goal of paying the loan off faster, I would NOT recommend that you refinance. If you really need to lower your minimum loan payment due to a possible cash flow cruch then refinancing would be a good choice, but in that case it would take LONGER to pay off the loan, even at a lower interest rate. The thing about mortgages is that at the beginning more of the payment goes to interest than to principal, so when you refinance and start the amortization schedule over again, even with a lower rate more of the payment is going to go to interest. The shorter the loan term, the less interest rate matters - just like when investments compound it's only over long stretches that you see a big difference.

CURRENT LOAN
I did an amortization schedule on the loan that you have and verified all the numbers you gave. The current loan is a 15 year fixed mortgage that will be paid off Oct 31 2019 (or whenever right before your nov 2019 payment would be due). If you keep this loan, from now until the loan is paid off, you will pay another $74,134 in total payments. Only $11,752 of that will go to interest - the remaining $62,384 will just go to pay down the loan principal.

10 YEAR FIXED REFI
If you refinance to a 10 year fixed loan at 3.6% then your monthly payment would be $633.29 (I assume a starting balance of $64,043 in Sept 2013 - projected/lowered principal in 60 days when closing would be plus $2600 in closing costs). If you kept making your $988 payment then you'd make a total of 74 more payments that total $73,144 in payments - almost the exact same deal you have now. You'd save $1000 over the next 6 years.

Edited to back out any assumed closing costs:
PENFED 5 YEAR ARM REFI
If you refinance into the 5 year PenFed Arm with zero closing costs, your monthly payment would be $250.84 (assumes starting balance of $61,443 in 2 months, when closing would probably be). If you keep making your $988 payment, you will make $69,192 in total payments instead (two more on the current mortgage plus 68 in total on the new PenFed mortgage). The new loan would pay off in May 2019 - as opposed to October 31 2019 as is currently scheduled. Your savings of roughly $5K in interest amount to the 5 months of payments you'd save by paying it off earlier. (I assumed the beginning rate of 2.75% through the life of the loan even though after 5 years the last 8 months would likely be at the 4.75% rate and cause another month of payments; the additional interest is likely minimal though and I didn't want to bother constructing a separate ARM amort with multiple rates).

If I bothered to back out inflation and the tax advantages you'd lose too by refinancing (interest is tax deductible), you are likely really not looking at much of a difference at all even with the PenFed option. In your case, refinancing is just not going to pay this loan off very much faster, even if you keep making your current payment after refinancing instead of paying your new lower minimum. All you're going to accomplish is paying nearly 4% of the loan in closing costs and making your life a lot more complicated for about 60 days while you participate in the mind numbing mortgage industry circus that is trying to get a loan refinanced. Then you have to maintain discipline to pay extra on the loan for years. The result will be the same. You'll have the loan paid off in about 6 years. Over that time a lot could happen anyway - you could get married or move for another reason and make it a rental sooner than you think. You're already getting the mortgage paid for by rent. I say sit tight at keep the good deal you've got now.

[By the way, I am wondering if you even qualify to refinance. You say "I recently became the successor trustee to my father's estate." Is the deed to the home in your personal name, or is it still under your dad or his estate? If you don't directly and personally own the house, then refinancing may not be possible, at least with a conventional standard loan with rates like the ones you have been quoted.]


Thanks so much for the number crunching! I realize that I can probably save around 5k by paying my current loan off early instead of refinancing, but its the flexibility of a lower payment that is steering me toward refinancing. I have a pretty secure job for now and my monthly mortgage payment is pretty much covered through renting...but 6 years is a long time. If I can refi and get that flexibility at no cost, while saving a little money in doing so, then I think its worth it. I suppose the only thing holding me back is the hassle of refinancing and then maintaining the discipline of doubling up afterwards. I mean...I could get married in 6 years lol. And, yes my name is now on the deed and everything is finalized (after lots of legal fees).
Lacrocious wrote:I will let others help you determine if the PenFed 5/5 ARM is right for you, but we just closed last Wednesday, and the loan funded today (3rd business day). we received the 2.5%, no closing cost 5/5 ARM - it is right for us.

There is a 3 year, prorated monthly, payback of closing costs if you payoff the loan (or refinance) within 3 years. Not a penalty, really - they expect to recoup the closing costs that they cover via interest, and if you pay it off too soon, they don't recoup the cost. We have no issues with this. We are staying in the house for at least 3 years (youngest will be a sophomore in high school this year) - so that gets us past the repayment date. Closing costs were about $1400 - so we can calculate what it will cost if we ever do want to pay it off early.

The refinance went very smoothly. The biggest hold-up was my town not responding to the title company to check for leans, etc. The rest went very smoothly. The loan processor at PenFed kept me up-to-date with processes via email, but was available for me to call with a direct number at any time. I did that a few times when it was easier to discuss status rather than trade 20 emails of questions back and forth. We applied in late May and closed July 10th. They were shooting for a mid-June closing, but my town blew that. We didn't care that much - a few days more of the higher interest wasn't enough to get worked up about, and it wasn't PenFed's fault in any way.

The best part of the closing was that it was done at our kitchen table. They sent a title company representative to our house to close. We are half-way across the country from where PenFed is located. I have to say it was an easy experience.

-L

Thats really encouraging...I've heard some nightmare stores of numerous loan processors being assigned and whatnot. I like the idea of one for the whole process. Hopefully thats how penfed operates. I have some more googling to do though.

G-Money wrote:Running the numbers through an amortization calculator, I think the savings would actually be greater for be OP than the $5,000 Meg77 projected. If rates jumped to the max of 4.75% after month 60, and if OP continued paying $988 per month, I calculate a savings of approximately $5,800. If rates don't jump that high, savings could be as high as $6,000. I've done a handful of no closing cost refis to save less than that. That amount of savings is equivalent to moving $100,000 from Morgan Stanley/Edward Jones/name-your-too-expensive-broker-or-fund-company to Vanguard and reducing your average ER from 1.20% to 0.20%.

Meg77's point about discipline in maintaining the current payment rate is well taken. On the other hand, you MUST make the $988/month payment now; that's the minimum. A refinance to the 5/5 ARM would at least give you some flexibility in the event life happens. While paying less than $988/month would mean you wouldn't save as much as the projections above show, you'd at least get to keep your house, which would not be the case if you paid less than $988/month now.

Yeah that was my thought exactly! However, I highly doubt refinancing would amount to about an hour of work for me...but then again!

Thanks everyone.
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Re: Should I Refinance?

Postby harikaried » Wed Jul 17, 2013 1:45 am

gjgarcia41 wrote:However, I highly doubt refinancing would amount to about an hour of work for me...
Even if it takes a whole day of work, you would earn roughly 2 months of income with that time. Or if you compare it to your monthly savings, then it's probably going to be many times months of income.
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Re: Should I Refinance?

Postby Lacrocious » Wed Jul 17, 2013 6:59 am

gjgarcia41 wrote:...Thats really encouraging...I've heard some nightmare stores of numerous loan processors being assigned and whatnot. I like the idea of one for the whole process. Hopefully thats how penfed operates. I have some more googling to do though....

All I can say is that we were assigned 1 loan processor from PenFed and she helped us the whole way. There was a different person from the title company that came to the closing - but that was not PenFed itself.

- L
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Re: Should I Refinance?

Postby Bacchus01 » Wed Jul 17, 2013 7:48 am

My rule of thumb is that if the payback on the interest savings (not the total payment savings, just the interest) versus closing cost/fees is less than a year...it's a good deal and worth the time.
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Re: Should I Refinance?

Postby harikaried » Wed Jul 17, 2013 10:17 am

Bacchus01 wrote:My rule of thumb is that if the payback on the interest savings (not the total payment savings, just the interest) versus closing cost/fees is less than a year...it's a good deal and worth the time.
So then would you do any no-cost refinances if the rate is lower than the current loan? For example a $100k loan 30-year fixed at 4.5% costs a total of $82,404.57 in interest, and within a month, the rate drops 1/8 percent (lower monthly payments by $7.40) for a no-cost refinance where 4.375% results in $79,740.85 interest, i.e., savings of $2663.72. Or if you keep making the same payments as before, so $7.40 extra principal each month, you would save an additional $2,733.30.

Even if you look at savings over 1 year instead of the full 30 years, using the same numbers from before, 1st year saving is $125 going from 4.5% to 4.375%. (Making the extra $7.40 principal payment over 1 year saves an extra $1.59. This number is the same as earning 4.375% interest on a savings account that you deposited $7.40 each month for one year.)

Keeping the 1 year benefit in mind is useful if you think you might pay off the loan in a year perhaps for another no-cost refinance or sale.
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Re: Should I Refinance?

Postby sesq » Wed Jul 17, 2013 12:53 pm

IIRC Penfed has a 60 month HEL that is at 2.49%. Payments would be around 1200, which your renters would cover most of. Closing costs are just the appraisal.

Correction, rate is now 2.74%.
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Re: Should I Refinance?

Postby MathWizard » Wed Jul 17, 2013 5:22 pm

G-Money wrote:
MathWizard wrote:A local credit union did a no-cost 7 year HEL at 3.875% for me last Dec with a principal balance of $45K\.
There was no minimum time to avoid a prepayment penalty. I could pay it off the next day. (I asked.)
If you coudl get something close to that, it would seem a great fit for you.

The breakeven on a 2.875% 15 year fixed with $1600 closing costs was not that great, so I went with the HEL
which was immediately cheaper, and I leaves me the option of paying off early.

That strikes me as a high price to pay to avoid the prepayment penalty. If you can force yourself to wait 3 years to pay off the loan, looks like you'd save money with PenFed's 5/5 ARM, too. You could dump the excess money in a CD or short-term bond fund, or just pay down your principal most of the way, leaving just enough in your mortgage that you can make minimum payments (based on a 30-year amortization) until it will be paid off in full 3 years + 1 day from the date of closing.

With a 7 year pay-off, starting the first 5 years at 2.75%, and assuming rates jumped the max (to 4.75%) for years 6 and 7, your blended rate would be right around 3.00%, with no closing costs. Pay it off sooner, or if rates don't jump that high, and your average rate would be even lower. Perhaps not worth the time and paperwork if it's too small a balance, but at least worth considering.


The HEL was $1/month cheaper than the 2.875% with closing costs.

I thought my balance was too low for the PenFed 5/5 ARM when I checked and I don't like ARMs on principle.
I looked long and hard at the PenFed 5 year 1.99% HEL but it would have raised my payments $178 a month just
when I was getting ready for my 2nd child in college at the same time. I would have saved $2,265 over the 5 year
loan compared to the 3.875% I pay now now based on the same 5 year payoff, but I would have lost flexibility just
when my expenses were at their peak.

I was already saving $1932 over the life of the 7 year loan by taking the local HEL, my payments were going down,
and I could always switch later (no prepayment penalty) if a better deal came along. I also did not have to pay escrow,
so I could lower taxes by bunching up property taxes and church donations (saved $500 over 2 years).
It was in town and easy, it all took less than a week, no shuffling of papers back and forth. The local CU took my
assessment as proof of LTV, no real hassle involved. I had a bird in the hand, and I took it.
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