Does it make sense to refinance?

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DS1986
Posts: 33
Joined: Thu Aug 17, 2017 3:20 pm

Does it make sense to refinance?

Post by DS1986 »

Hi, I get very confused when it comes to whether the numbers make sense on a refinance and I was hoping I can get some clarity. I was given a loan estimate as described below.

My current mortgage: 30 year fixed, 3.75%. $382,000 and 25 years left. My P&I is $1908 per month. The Zillow Estimate is $785,000.

Re-finance option 1: 25 year fixed, 2.99%. P&I would be $1833 per month. No closing costs (with lender credit $1800 and waived appraisal fee).
Re-finance option 2: 30 year fixed, 2.99%. P&I would be $1609 per month. No closing costs (with lender credit $1800 and waived appraisal fee).

We plan on staying in the house for another 5 years. Is one option much better than the other? Is it worth refinancing at all? It seems like a no-brainer to at least do the 25 year refi since there are no closing costs, but the 30-year gives me much more cash flow.

Thanks for any help!
mortfree
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Re: Does it make sense to refinance?

Post by mortfree »

If you really, truly will only be there for five more years:

I would look into the 30-year.

I would play with the numbers.

Do you want a lower payment or would you rather borrow more (pull money out) and keep your payment the same or close to the same?

Smarter people will be along.
Stats78
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Joined: Wed Jun 10, 2020 6:01 pm

Re: Does it make sense to refinance?

Post by Stats78 »

Hi there. Long time reader, first time poster. We just refinanced under a similar situation; we were offered either a 20 year loan at 3% or a 30 year loan at 3% with very similar closing costs. I don't see any reason to take the shorter loan in this situation. Without a pre-payment penalty, you can pay off the 30 year loan in 20 years if you prefer, but you get some extra flexibility for free.
ciscovp
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Re: Does it make sense to refinance?

Post by ciscovp »

I would think if the rates are the same then it better to go for the higher year (30 year in this case).
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Watty
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Re: Does it make sense to refinance?

Post by Watty »

ciscovp wrote: Wed Jun 10, 2020 6:27 pm I would think if the rates are the same then it better to go for the higher year (30 year in this case).
+1

You can always go with the 30 year but pay a couple of hundred dollars extra each month. If the rates and closing costs are the same there is no reason to even consider the 25 year mortgage.
lakpr
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Re: Does it make sense to refinance?

Post by lakpr »

Look for 5/1 ARM and 7/1 ARM rates also ...

It does make sense for you to refinance, you are getting a 0.75% break on the interest rate. Since there is no difference between a 25-year and a 30-year mortgage term, I'd go for the longer term.
dandinsac
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Re: Does it make sense to refinance?

Post by dandinsac »

You should definitely refinance. In 5 years, you will have paid less P+I and have a smaller mortgage balance.
delamer
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Re: Does it make sense to refinance?

Post by delamer »

You’ll have paid down more principal (that is, you’ll have more equity in the house) in 5 years if you go with the 25 year loan.

Just another factor to consider.
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DS1986
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Re: Does it make sense to refinance?

Post by DS1986 »

delamer wrote: Wed Jun 10, 2020 7:03 pm You’ll have paid down more principal (that is, you’ll have more equity in the house) in 5 years if you go with the 25 year loan.

Just another factor to consider.
This is what I was thinking about. I will have less equity in the house over the next 5 years, but the increase in cash flow from the 30-year can be used to invest at a hopefully higher than 3% rate of return? I'm gathering from the responses there isn't much of a difference. Basically an increased cash flow vs. decreased equity in the house decision.
Familyman2012
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Re: Does it make sense to refinance?

Post by Familyman2012 »

DS1986 wrote: Thu Jun 11, 2020 11:22 am
delamer wrote: Wed Jun 10, 2020 7:03 pm You’ll have paid down more principal (that is, you’ll have more equity in the house) in 5 years if you go with the 25 year loan.

Just another factor to consider.
This is what I was thinking about. I will have less equity in the house over the next 5 years, but the increase in cash flow from the 30-year can be used to invest at a hopefully higher than 3% rate of return? I'm gathering from the responses there isn't much of a difference. Basically an increased cash flow vs. decreased equity in the house decision.
I agree with this. But since I don't know really anything about investing :( I'll take the 30 years. Pay a few hundred towards principle (increase equity) every month and sleep comfortable knowing I have flexible from month to month if needed.
delamer
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Re: Does it make sense to refinance?

Post by delamer »

DS1986 wrote: Thu Jun 11, 2020 11:22 am
delamer wrote: Wed Jun 10, 2020 7:03 pm You’ll have paid down more principal (that is, you’ll have more equity in the house) in 5 years if you go with the 25 year loan.

Just another factor to consider.
This is what I was thinking about. I will have less equity in the house over the next 5 years, but the increase in cash flow from the 30-year can be used to invest at a hopefully higher than 3% rate of return? I'm gathering from the responses there isn't much of a difference. Basically an increased cash flow vs. decreased equity in the house decision.
Even if you’d really invest the difference, the amount is small enough that it isn’t going to have a material impact on your financial well-being.
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BrandonBogle
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Re: Does it make sense to refinance?

Post by BrandonBogle »

Watty wrote: Wed Jun 10, 2020 6:47 pm
ciscovp wrote: Wed Jun 10, 2020 6:27 pm I would think if the rates are the same then it better to go for the higher year (30 year in this case).
+1

You can always go with the 30 year but pay a couple of hundred dollars extra each month. If the rates and closing costs are the same there is no reason to even consider the 25 year mortgage.
This. I would get the 30-year no-cost mortgage and pay $1,833/mo unless you feel better using $200/mo of that elsewhere.
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