Rate Reduction or Refinance

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Topic Author
Buddtholomew
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Rate Reduction or Refinance

Post by Buddtholomew » Mon Aug 12, 2019 5:12 pm

Interested in opinions on whether to take a 4.25 to 3.875 rate reduction on a 600K mortgage for $700 out of pocket. 301 months remaining and a savings of $125/mo. 6 months to breakeven.
OR
4.25 to 3.875 refinance and 3000 closing costs (rolled into mortgage), reset to 360 months for a monthly savings of $400. 8 months to breakeven.

CA resident so mortgage interest deduction ain’t what she used to be. Thanks for the replies.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

Goal33
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Re: Rate Reduction or Refinance

Post by Goal33 » Mon Aug 12, 2019 5:18 pm

If these are your only two options then I would do the first one.
A man with one watch always knows what time it is; a man with two watches is never sure.

Topic Author
Buddtholomew
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Joined: Thu Mar 01, 2007 3:29 pm

Re: Rate Reduction or Refinance

Post by Buddtholomew » Mon Aug 12, 2019 5:20 pm

Goal33 wrote:
Mon Aug 12, 2019 5:18 pm
If these are your only two options then I would do the first one.
Can you explain your thought process?
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

Silk McCue
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Re: Rate Reduction or Refinance

Post by Silk McCue » Mon Aug 12, 2019 5:21 pm

No way would I start over at 30 years again. That would be deflating. The goal is to pay it off.

Cheers

jminv
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Re: Rate Reduction or Refinance

Post by jminv » Mon Aug 12, 2019 5:58 pm

Buddtholomew wrote:
Mon Aug 12, 2019 5:12 pm
Interested in opinions on whether to take a 4.25 to 3.875 rate reduction on a 600K mortgage for $700 out of pocket. 301 months remaining and a savings of $125/mo. 6 months to breakeven.
OR
4.25 to 3.875 refinance and 3000 closing costs (rolled into mortgage), reset to 360 months for a monthly savings of $400. 8 months to breakeven.

CA resident so mortgage interest deduction ain’t what she used to be. Thanks for the replies.
I would take the $700 rate reduction option since you'll likely refinance later when rates drop farther.

The refinancing offer isn't that great of a deal -I'm seeing 3.625% in CA at those values for similar closing costs.

seawolf21
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Re: Rate Reduction or Refinance

Post by seawolf21 » Mon Aug 12, 2019 6:06 pm

How is "break even" being calculated? If it is current monthly payment vs. new monthly payment, then the break even calculation is not accurate because the monthly payment consist of principal and interest. The portion attributable to principal is not money you are giving the the bank, it is a conversion of cash into equity in your property; only the interest portion is money you never see again.

Paying $3K for option 2 is not really saving you $400 a month if breakeven is calculated based on how much less monthly payment is. Additionally, the front half of a mortgage is mostly interest. So while you may be writing a check for $400 less a month, those payment at the beginning of the loan will be all interest (money you never see again). As you progress further into loan payments, the amount of the monthly payment made up of principal increases (converting cash to equity) while the amount of interest decreases.

Without actual numbers and monthly payments, it's hard to tell but based on information provided, I agree with Goal33. Why would you pay $3,000 for the opportunity of resetting the term and paying the bank more interest in each monthly payment.

tj218
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Re: Rate Reduction or Refinance

Post by tj218 » Mon Aug 12, 2019 6:07 pm

Seems like I am going anti-Boglehead here but it just seems like there are enough signs out (slowing economy, global trade, stock market bull run seemingly slowing/ending) there that rates will drop more than this by the end of the year. I already have a decent rate (3.625%) but am looking to reduce it down from the original 20year to a 15 or 10 year. I can already get the 15year at my current monthly payment, but I am going to be greedy and wait another month or two.

JoeJohnson
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Re: Rate Reduction or Refinance

Post by JoeJohnson » Mon Aug 12, 2019 6:10 pm

Silk McCue wrote:
Mon Aug 12, 2019 5:21 pm
No way would I start over at 30 years again. That would be deflating. The goal is to pay it off.

Cheers
Refi to 30 years and pay additional principal each month to make the loan duration shorter.

seawolf21
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Re: Rate Reduction or Refinance

Post by seawolf21 » Mon Aug 12, 2019 6:15 pm

tj218 wrote:
Mon Aug 12, 2019 6:07 pm
Seems like I am going anti-Boglehead here but it just seems like there are enough signs out (slowing economy, global trade, stock market bull run seemingly slowing/ending) there that rates will drop more than this by the end of the year. I already have a decent rate (3.625%) but am looking to reduce it down from the original 20year to a 15 or 10 year. I can already get the 15year at my current monthly payment, but I am going to be greedy and wait another month or two.
If you are willing to bet on that, can you just refi at current rate at close to "no-cost?" If the rate drops further as you predict, refi again.

15-year is 3.0% to 3.125% at "no-cost" (lender credit nets out 3rd party closing).

I financed last November on new purchase at 15 year 3.875 15 year. Two months ago, refinanced to 3.625 15 year. Currently locked into 3.0% 15 year. The two refinance have been/is "no-cost."

Silk McCue
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Re: Rate Reduction or Refinance

Post by Silk McCue » Mon Aug 12, 2019 6:19 pm

JoeJohnson wrote:
Mon Aug 12, 2019 6:10 pm
Silk McCue wrote:
Mon Aug 12, 2019 5:21 pm
No way would I start over at 30 years again. That would be deflating. The goal is to pay it off.

Cheers
Refi to 30 years and pay additional principal each month to make the loan duration shorter.
Their first option keeps the current term in place, is less expensive to achieve from a transactional position and they can still pay more principal if they want. Refi to 30 years makes little to no sense unless you just love being in debt forever.

Cheers

afan
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Re: Rate Reduction or Refinance

Post by afan » Mon Aug 12, 2019 6:24 pm

If you are correct that the break even is only 2 months further along and there ia a big difference in monthly payments then you should be far ahead after a few years with the second option.

But break even time is not the right way to analyze this because it ignores what happens after that point. This is a classic net preaent value question. You can do that yourself in a spreadsheet or with financial functions in a calculator. Or go to the mortgage professor site and plug in your numbers.

The last time rates were this low may have been right after the Brexit vote, when the financial world was coming to an end. Except, not. If I could predict the direction of interest rates I would be so rich I would not need a mortgage to buy a $600 million house. If there is anyone who can predict these rates they are doing what I would do: keep it quiet until I was rich enough to stop playing.

Don't think you know what rates will be in a year. You don't.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

seawolf21
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Re: Rate Reduction or Refinance

Post by seawolf21 » Mon Aug 12, 2019 6:44 pm

Agreed with afan. If you can predict (instead of "a prediction" that came true due to coincidence) where rates are heading, you would be rich.

Goal33
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Re: Rate Reduction or Refinance

Post by Goal33 » Mon Aug 12, 2019 7:32 pm

Buddtholomew wrote:
Mon Aug 12, 2019 5:20 pm
Goal33 wrote:
Mon Aug 12, 2019 5:18 pm
If these are your only two options then I would do the first one.
Can you explain your thought process?
The additional savings of the 2nd option is only because you’re increasing the term. I’d take the lower rate and same term for cheaper.
A man with one watch always knows what time it is; a man with two watches is never sure.

mariezzz
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Re: Rate Reduction or Refinance

Post by mariezzz » Mon Aug 12, 2019 7:40 pm

seawolf21 wrote:
Mon Aug 12, 2019 6:06 pm
How is "break even" being calculated? If it is current monthly payment vs. new monthly payment, then the break even calculation is not accurate because the monthly payment consist of principal and interest. The portion attributable to principal is not money you are giving the the bank, it is a conversion of cash into equity in your property; only the interest portion is money you never see again.

Paying $3K for option 2 is not really saving you $400 a month if breakeven is calculated based on how much less monthly payment is. Additionally, the front half of a mortgage is mostly interest. So while you may be writing a check for $400 less a month, those payment at the beginning of the loan will be all interest (money you never see again). As you progress further into loan payments, the amount of the monthly payment made up of principal increases (converting cash to equity) while the amount of interest decreases.
Absolutely agree with the comments about 'break even'. OP is not thinking about this correctly.

Topic Author
Buddtholomew
Posts: 988
Joined: Thu Mar 01, 2007 3:29 pm

Re: Rate Reduction or Refinance

Post by Buddtholomew » Mon Aug 12, 2019 8:47 pm

Thanks for the feedback.
Breakeven was only included to calculate recouping costs.
Does not account for total spent over the life of the loan.

It’s a question of lowering payment ($400) to extend term versus lowering payment ($125) and keeping existing 301 month term. Looks like the latter is the clear choice.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

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