Refinance suggestion needed from the Maths wizards :)

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Topic Author
wingz
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Joined: Wed Nov 26, 2014 9:34 pm

Refinance suggestion needed from the Maths wizards :)

Post by wingz » Thu Aug 27, 2015 4:23 pm

Its been a few days and we are unable to decide on should we refinance to a 15 year mortgage or not, any thoughts from community will be helpful.
The intent is to payoff the mortgage as soon as possible so we have been throwing extra money to it every month. Will the 15 year at 3.5% make sense or should we keep the current and continue making extra payments?

Current value - 230k
Mortgage balance - 150k
Current Rate - 3.75%
30 year conventional

Cost to refinance to 3.5% 15 year is 2.5k which will be rolled into the loan, making out of pocket expense $400.
are we better paying the 2.5k cash or roll into loan?

Any other ideas?

Extra info if it matters -
2015 IRA's HSA 529 invested in Jan
2016 IRA's HSA 529 cash in separate saving will be invested 1st day of 2016
emergency fund 10k in place
extra cash available 10k
post tax investments 120k
HHI 200k

NightFall
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Re: Refinance suggestion needed from the Maths wizards :)

Post by NightFall » Thu Aug 27, 2015 4:40 pm

You haven't provided enough information. What is your current monthly payment on the 30 year and how much time do you have left? You could always play around with a mortgage calculator.

http://www.bankrate.com/calculators/mor ... lator.aspx

bigred77
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Re: Refinance suggestion needed from the Maths wizards :)

Post by bigred77 » Thu Aug 27, 2015 4:48 pm

There is absolutely no way I would pay 2.5k to cut my interest rate on 150k by 0.25% (plus you are giving up a 30 amortization schedule to move to a 15 yr).

You would be far better off to throw the 2.5k at the remaining loan balance. Saving 0.25% of 150k is only 375 dollars.

I think if you shop around you can get better terms on a 15 yr mortgage, in which refinancing might then make sense.

Grapevine ATL
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Location: Atlanta, GA

Re: Refinance suggestion needed from the Maths wizards :)

Post by Grapevine ATL » Thu Aug 27, 2015 5:09 pm

Somebody is offering you really terrible terms. 3.5% is out of the question. Somebody is smoking absolute crack.

I'm a broker in GA and we're doing 3% all day long, with a credit!

Fun fact: 15 Year mortgage rates are unaffected by credit scores between 640 and 850. I do have one lender who credits .125% if over 740, but that's the only tranche.

Edited to add: 3.5% is paying a yield spread of 4.375% right now. That means your lender is getting paid over $6,000 for that transaction before taking any fees into account.
Last edited by Grapevine ATL on Thu Aug 27, 2015 5:11 pm, edited 1 time in total.

NightFall
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Re: Refinance suggestion needed from the Maths wizards :)

Post by NightFall » Thu Aug 27, 2015 5:11 pm

bigred77 wrote:You would be far better off to throw the 2.5k at the remaining loan balance. Saving 0.25% of 150k is only 375 dollars.
Maybe, maybe not. A 15 year for $152,000 at 3.5% has a monthly payment of $1,090.20. The owner will pay $43,735.26 in interest over the life of the mortgage.

A 30 year for $150,000 at 3.75% has a monthly payment of $694.67. Paying an extra $396 per month (to make the payments equal) yields a life time interest of $46,359.98. The 15 year with the 2.5K extra cost wins... but not by a huge amount. Interestingly, this strategy pays off the 30 year in basically the same amount of time as the 15 year.

0.25% of 150K is only $375... per year. It's a 15 year loan.

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#Cruncher
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Re: Refinance suggestion needed from the Maths wizards :)

Post by #Cruncher » Thu Aug 27, 2015 7:25 pm

wingz in original post wrote:Will the 15 year at 3.5% make sense or should we keep the current and continue making extra payments? ...
Mortgage balance - 150k Current Rate - 3.75% 30 year conventional
Cost to refinance to 3.5% 15 year is 2.5k which will be rolled into the loan, making out of pocket expense $400. [A]re we better paying the 2.5k cash or roll into loan?
I'm confused. What is the $400 "out of picket expense"? Is the cost to refinance $2,500 or is it $2,900? Even if it's only $2,500, the savings would only be $0.63 per month assuming both loans were paid off in 15 years.

Code: Select all

1,090.83 =PMT(3.75% / 12, 12 * 15,  -150000, 0, 0)
1,090.20 =PMT(3.50% / 12, 12 * 15,  -152500, 0, 0)
This is hardly worth losing the flexibility of the 30-year payment schedule should you encounter financial hard times.

Paying the $2,500 expense upfront is no different in principle than any other prepayment of the loan. It would reduce the monthly payment from $1,090.20 to $1,072.32. The $17.88 monthly savings would represent a 3.5% "return" on the $2,500 "investment", the same as the "return" from any other loan prepayment.

Code: Select all

1,072.32 =PMT(3.50% / 12, 12 * 15,  -150000, 0, 0)
    3.5% =12 * RATE(12 * 15, 1090.20 - 1072.32, -2500 ,0, 0)
Using Excel PMT and RATE functions.

Topic Author
wingz
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Joined: Wed Nov 26, 2014 9:34 pm

Re: Refinance suggestion needed from the Maths wizards :)

Post by wingz » Thu Aug 27, 2015 7:40 pm

Whoa! so glad i posted it here, thank you everyone for helping here.
Though i dont understand the maths behind refinance, i am going to trust all of you.

@nightfall - about 27 years left, P+I is $820, taxes etc is $215; total monthly $1,035

@bigred - thank you, i will try to see if i can get a better rate, i called 3 places and all three offered 3.5%

@grapevineatl - :( i dont know if state makes a difference, i am in AZ and FICO is 805

@#cruncher - total cost is $2900, off which 2500 will be rolled into the account

based on all your responses, it looks like this refinance doesn't make sense, also do you think throwing 30k extra on principal and then refinancing will make it any better? we have the flexibility.

End goal is to get rid of mortgage as soon as possible.

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jabberwockOG
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Re: Refinance suggestion needed from the Maths wizards :)

Post by jabberwockOG » Thu Aug 27, 2015 9:58 pm

If you are looking to pay the home loan off as early as possible there is absolutely no benefit to refinance. Make double or triple payments on it and get it paid off and forget it.

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Watty
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Re: Refinance suggestion needed from the Maths wizards :)

Post by Watty » Thu Aug 27, 2015 10:36 pm

wingz wrote:HHI 200k
......
End goal is to get rid of mortgage as soon as possible.
If HHI is house hold income then I would think you could pay off at least $50K a year and have it gone in three years which would make a refinance unnecessary.

Topic Author
wingz
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Joined: Wed Nov 26, 2014 9:34 pm

Re: Refinance suggestion needed from the Maths wizards :)

Post by wingz » Fri Aug 28, 2015 12:40 am

Yes thats house hold income, and that is the plan another 2 years. We are saving some money to knock this out.

absolutFinance
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Re: Refinance suggestion needed from the Maths wizards :)

Post by absolutFinance » Fri Aug 28, 2015 12:47 am

i've found the best refi rates from aim loan - i'm not affiliated with them, just in the middle of a cash out refi on a place we just bought and they were better than everyone else by at least 1/8, if not 1/4 pt.

kazper
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Re: Refinance suggestion needed from the Maths wizards :)

Post by kazper » Fri Aug 28, 2015 4:28 am

absolutFinance wrote:i've found the best refi rates from aim loan - i'm not affiliated with them, just in the middle of a cash out refi on a place we just bought and they were better than everyone else by at least 1/8, if not 1/4 pt.
Currently shopping for refinancing myself. Had pretty much the same experience with aim loan. You should be receiving a lower rate and a credit based on your circumstances.

Spewin
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Re: Refinance suggestion needed from the Maths wizards :)

Post by Spewin » Fri Aug 28, 2015 7:32 am

wingz wrote:Yes thats house hold income, and that is the plan another 2 years. We are saving some money to knock this out.
I hope that you mean that you are paying extra to knock it out. Saving the amount in a savings account and then paying off in a lump sum is sub optimal. Just pay as much as you can extra each month.

psychoslowmatic
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Re: Refinance suggestion needed from the Maths wizards :)

Post by psychoslowmatic » Fri Aug 28, 2015 12:12 pm

If you plan to pay it off in 3 years, how about a 5/1 arm?

Third federal offers some $295 closing cost loans, mostly ARMs but they do have a 10 year fixed at 2.99%

an_asker
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Re: Refinance suggestion needed from the Maths wizards :)

Post by an_asker » Fri Aug 28, 2015 12:44 pm

psychoslowmatic wrote:If you plan to pay it off in 3 years, how about a 5/1 arm?

Third federal offers some $295 closing cost loans, mostly ARMs but they do have a 10 year fixed at 2.99%
I suggest Penfed's 5/5 ARM, currently at 2.875%.

inbox788
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Re: Refinance suggestion needed from the Maths wizards :)

Post by inbox788 » Tue Sep 01, 2015 8:06 pm

bigred77 wrote:There is absolutely no way I would pay 2.5k to cut my interest rate on 150k by 0.25% (plus you are giving up a 30 amortization schedule to move to a 15 yr).

You would be far better off to throw the 2.5k at the remaining loan balance. Saving 0.25% of 150k is only 375 dollars.

I think if you shop around you can get better terms on a 15 yr mortgage, in which refinancing might then make sense.
Agree. A 0.25% reduction isn't worth it. That 375 is only the first year and doesn't take into account potential tax difference and worst, every year or additional principal payment reduces that amount further. ROI is far too long if at all positive if you accelerate a bit.

A zero cost or low cost that would reduce the interest to 3% might be considered, but you have to go ARM or Penfed 5/5 to achieve it. Still may be worth the risk if you're committed to accelerating and don't mind taking the interest rate risk in 5 years.

denovo
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Re: Refinance suggestion needed from the Maths wizards :)

Post by denovo » Tue Sep 01, 2015 8:22 pm

To know the best option, you haven't provided the most important data point. How long do you plan on keeping the house?!
"Don't trust everything you read on the Internet"- Abraham Lincoln

edawg
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Re: Refinance suggestion needed from the Maths wizards :)

Post by edawg » Tue Sep 01, 2015 9:08 pm

wingz, From paying off 2 mortgages early on 2 different homes, here's some unusual advice...

1. Any refi lender is scared of refi'ing your situation. $150K is borderline "too small" for a traditional 30 year mortgage since it's fairly easy for the debtor with resources such as you have to get it down under a $100K HELOC sized debt and there's less lender incentive to bury closing costs in that small a loan since it's a higher payoff risk.

2. Agree with other posters, that $2.5K is not wise to spend to trim an interest rate. Lenders want the up front fees and to pass along the long term payoff risk to the mortgage securities market or government lender (who could theoretically just "create" more money to buy toxic loans if "whatever" Mac lender goes under again)

3. Can you pull from several pots of funds to come up with roughly $60K w/o using any more than half the emergency fund? If you have the discipline to pay yourself back monthly, this allows you to refinance by using a HELOC with true zero or sub $500 transaction cost, then paying off the primary mortgage. Yes, the interest rate may be a tad higher, but your payment and amortization schedule allows more monthly cash flow towards principal to accelerate monthly pay off. The downside of this approach is HELOCs are "full recourse" loans which means the HELOC lender can garnish wages, etc. to be paid. With your resources, this is a minimal concern.

4. Do you have things free and clear that can be "down sized" to possibly free up a chunk of equity? Large pickup trucks or SUVs with loans? Any boats, jetskis, campers or other toys that are consuming resources that can be put towards this? Any antique or other items that consume valuable square footage you're paying debt on to store? Seriously, all items are on the block when debt is over your head. Things you sell now, you can buy with cash later.

5. Check out moneymustache.com for some of the good ideas to trim monthly expenses to free up additional principal payment room every month on the mortgage NOW (or HELOC later).

6. Once you pay off both the first mortgage and later the HELOC, never take a mortgage again. If spouse or SO says "we paid it off once, we can do it again", lifestyle creep is occurring and all that hard work was for nought. Yes, sometimes a great real estate deal comes along, but the best one is the one you're living in that's paid off! Resist the urge if it ever happens again!!

Good luck. And Peace.

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