Refinance...am I missing something?

[berg]

I am 21 months in to a 30 year mortgage with a rate of 3.625%. Home value is about $950k, currently owe about $532k. Current monthly P&I = $2,508.

I just talked to the mortgage guy I used for my purchase. He can get me down to 3.375% with $3500 in closing costs. This gets me a monthly P&I of $2,352, saving me $156 per month. Breakeven is about 22 months.

For an additional $3,000 he can get the rate to 3.25% for a monthly P&I of $2,315. This saves me $193 for a breakeven of about 34 months.

This home has plenty of space in our ideal location and we have two children age 5 and 3. We plan to stay through them being in college barring unforeseen circumstances.

I'm thinking of taking the 3.25% even at the cost given our plans to stay. Thoughts??

[Goal33]

How do you have so much equity so fast? Are you prepaying? If so maybe a 7/1 arm makes more sense.

[berg]

How do you have so much equity so fast? Are you prepaying? If so maybe a 7/1 arm makes more sense.

We put down $380k on the purchase. Original loan was $550k. We do not prepay - at 3.625% we chose to invest in taxable instead. I'd prefer to keep the 30 year, though would maybe pay it down in such a way to still only have 28 years left.

[chevca]

I'd pass for now. That's not enough of a difference for me. Wait a bit to see if rates go lower. If they don't, oh well. I also have a 3.625% mortgage and haven't even looked into refinancing yet. If rates go down a good bit more, maybe then.

[deikel]

You are missing the opportunity cost: The 6500 you are plunking down don't generate money for you anymore making your break even more like 3.5 years

[berg]

You are missing the opportunity cost: The 6500 you are plunking down don't generate money for you anymore making your break even more like 3.5 years

That is a good point - though at current savings rates, the breakeven still doesn't feel that long for a home we plan to be in for 20+ more years.

[tjtv]

It's not how long you plan to be in the home that matters, it's how long you plan to be in the loan. What if rates drop even further 6 months from now and you want to refinance again? All those fees you paid have now vanished.

IMHO it's always wisest to go for a loan with no(or at least very low) out of pocket costs, even if the interest rate is slightly higher.

[deikel]

You are missing the opportunity cost: The 6500 you are plunking down don't generate money for you anymore making your break even more like 3.5 years

That is a good point - though at current savings rates, the breakeven still doesn't feel that long for a home we plan to be in for 20+ more years.

Certainly true, it just changes the math slightly depending on what return you expect from savings or investment

My local credit union mortgage gal suggested anything that breaks even under 4 years is worthwhile doing. Obviously the specific number is self serving to keep anyone in slightly higher mortgages, but its also not bad advice given that in my area the house turnover is actually relatively soon and about 5 years - I am sure many of those intended to live there longer, but ended up not doing so and move on - also rule of thumb for house buying is to stay at least 5 years otherwise the agent commission of 6% does not make sense...so much for rational people.

I am sitting on a 4% 30 yr (20 yr left) and getting antsy myself....

[epilnk]

We bought our first home in the late 90s, and refinanced so many times over the next 10-15 years I can't remember the total. I always went for no cost refis. That never got me the absolute lowest rate, but it worked out really well. There was no breakeven point, since if I didn't come out ahead on day 1 it wasn't time to refinance.

So I would say that if your crystal ball tells you that rates won't go lower, and/or you're going to hold the mortgage for the long haul, then go for it. 22 months is a pretty good break even point. But if you're like us - a serial refinancer who had to move more often than planned - the no cost refi is the better bet.

[Clemblack]

I'd stay with what you have. Just my $0.02.

[unclescrooge]

I'd stay with what you have. Just my $0.02.

Even if the OP could save 1/8th of a point with a no-cost refinance?

Not a big fan of free money, are we?

[chevca]

You could pay ahead aggressively a little bit and save the total interest amount just the same as a 1/8 point no cost refinance. Why bother?

Personally, if it isn't 1/2 a percent point or more difference, it's not even worth my time. Everyone's different that way though.

[berg]

You could pay ahead aggressively a little bit and save the total interest amount just the same as a 1/8 point no cost refinance. Why bother?

Personally, if it isn't 1/2 a percent point or more difference, it's not even worth my time. Everyone's different that way though.

We don’t plan to pay down early, which is why the lower we can have a rate that we plan to hold for the duration the easier it will be to produce returns that can beat it.

I normally get the don’t pay points thinking, but 3.25% on a 30 year is about as low as it has been historically (not that 3.625% is bad)

[somekevinguy]

You could pay ahead aggressively a little bit and save the total interest amount just the same as a 1/8 point no cost refinance. Why bother?

Personally, if it isn't 1/2 a percent point or more difference, it's not even worth my time. Everyone's different that way though.

We don’t plan to pay down early, which is why the lower we can have a rate that we plan to hold for the duration the easier it will be to produce returns that can beat it.

I normally get the don’t pay points thinking, but 3.25% on a 30 year is about as low as it has been historically (not that 3.625% is bad)

This is exactly my rationale- historically, rates really haven't been much lower than that and so while yes, in general, dont pay points and just keep refinancing at "no cost" when rates come down, kind of gambling based on history that rates are unlikely to move down significantly (and at least not enough to make it worth it to refinance). I chose the lower rate with slightly higher fees for the same reason.

[suemarkp]

Does the "break even" time account for the fact that you're resetting the clock on the new mortgage to 30 years? You'll have 2 more years of making payments compared to where you are now, even though the interest amount will be rather small in those last two years.

[fortfun]

It's not how long you plan to be in the home that matters, it's how long you plan to be in the loan. What if rates drop even further 6 months from now and you want to refinance again? All those fees you paid have now vanished.

IMHO it's always wisest to go for a loan with no(or at least very low) out of pocket costs, even if the interest rate is slightly higher.

I agree with this. My current rate is 3.0 and I actually made a couple grand on the loan (profit). No reason to think rates couldn't go that low again.