Picking the right mortgage refi

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minneapples
Posts: 43
Joined: Fri Jun 10, 2011 10:51 am

Picking the right mortgage refi

Post by minneapples » Thu Jul 23, 2015 4:14 pm

I am 5 years into a 30y fixed mortgage at 5%, and planning to refinance. My existing mortgage was a no-cost refi from a 30y loan that was at 5.625%. So I'm altogether 10 years into home ownership, and have about $199k remaining on the loan. We do not plan on moving. Even with home prices having fallen a lot generally since I purchased, I'm not too concerned about hitting the 80/20 LTV ratio due to (1) having made principal payments (2) a major basement renovation that has increased the value substantially (though how much has to wait for an appraisal, I guesss) and (3) generous parents who have offered to help us make up any difference so we can take advantage of better rates. (Parental help is a last resort -- we can cover closing costs on a refi, but if the appraisal comes in too low we would need to dip into savings more than I'm comfortable with -- we are expecting Baby #2 in a few months and I want to conserve cash.)

I'm leaning toward a 20year fixed with PenFed, at 3.50% paying 0.25 points. Here's my thinking: This is essentially the same monthly payment we have now ($22 less than the current payment), but with about 44% less in interest/closing costs over the life of the loan compared to what's outstanding on the existing loan. I also like that it essentially re-sets the term of the loan to be where it would have been if I hadn't refinanced my original loan. Assuming no extra principal payments (worst case scenario) we will pay off the loan when I am 55 and my husband is 57. That's before we plan to retire and will give us extra breathing room to make catch-up contributions to our retirement accounts (yes, we are currently maxing them out and have been for a while, no worries there) or to help our kids out a little financially when they are college age. And the 0.25 points seems like it makes sense -- essentially, pay $500 now to save $3k over the life of the loan.

We could take a 30 year loan at a slightly higher interest rate (3.875% -3.625% depending on points) and pay the difference between the lowered payment and the current payment, and pay it off just about 20 years from now. That has the benefit of flexibility in that we could make the lower regular payment if circumstances necessitated it, but also the disadvantage of flexibility -- I guess I'd rather be certain to be done in 20 years than maybe probably going to be done in 20 years. Total costs over the life of the loan would also be a little higher.

Alternatively, we could take a 15 year fixed at 2.75-3.0%, but that would require us to pay $275-300/month more than our existing loan, which I am reluctant to do with the prospect of #2 going into daycare in a really expensive daycare market. Things will get tight enough as it is for a few years with two in daycare I'd rather keep the same size payment we have now, and then make additional payments once the daycare costs abate than lock ourselves in to the higher mortgage payment now.

So -- what do you think? Are there things I'm not thinking of? I know 20y loans in general are not anyone's favorite option, and I see why that would be, as a general matter. They provide neither the flexibility of a 30y term nor the best interest rates of a 15y term. But I think it is the right fit for us in our current circumstances. I would appreciate troubleshooting, though!

icefr
Posts: 595
Joined: Sun Apr 17, 2011 10:50 am

Re: Picking the right mortgage refi

Post by icefr » Thu Jul 23, 2015 6:23 pm

The 20 year seems like a great fit for your situation, especially to get out from under that 5% mortgage! One thing I would investigate though is a "no cost" refi, in which you pay $0 at closing AND lower your current rate a huge chunk.

minneapples
Posts: 43
Joined: Fri Jun 10, 2011 10:51 am

Re: Picking the right mortgage refi

Post by minneapples » Thu Jul 23, 2015 6:27 pm

I'm not aware of any no-cost refis going anywhere with low rates these days -- any suggestions?

pierremonfrere
Posts: 146
Joined: Tue Jun 23, 2015 7:34 pm

Re: Picking the right mortgage refi

Post by pierremonfrere » Thu Jul 23, 2015 7:00 pm

I was looking into a refi a couple months back, as our current loan was made in 2008 and is terrible. The property however is a rental and they (local credit union) wanted to charge an extra 3% in closing costs compared to if it was a primary residence. They did mention that a way of lowering closing costs was to just get a home equity loan instead of doing a refi. This could also be done for any term length, so you could do 16 or 17 years if you wanted rather than being locked into 15 or 20 years. We just decided to wait until next year when we move back into the condo to redo our mortgage so I don't know any more details beyond that, but that could be an option where you live. Good luck.

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