Reduce our mortgage rate for 12 month CD?

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BoomerSooner24
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Reduce our mortgage rate for 12 month CD?

Post by BoomerSooner24 »

Going to be closing soon on our no cost refi, 15 year at 2.75%. Our mortgage broker reached out to us yesterday with an offer to reduce to 2.625 if we opened a $25k 12 month CD earning essentially nothing (~0.1%). Mortgage amount is $700k, home value $1.2M on recent appraisal. Won’t be in major rush to pay off with rate <3. We can easily have 25k tied up for a year, but question if worth it with terrible CD rate with nominal reduced mortgage rate. FWIW no other debt, max out retirement, healthy emergency fund. Not sure which direction to take. Thanks for any input!
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galawdawg
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Re: Reduce our mortgage rate for 12 month CD?

Post by galawdawg »

BoomerSooner24 wrote: Fri Sep 11, 2020 4:46 pm Going to be closing soon on our no cost refi, 15 year at 2.75%. Our mortgage broker reached out to us yesterday with an offer to reduce to 2.625 if we opened a $25k 12 month CD earning essentially nothing (~0.1%). Mortgage amount is $700k, home value $1.2M on recent appraisal. Won’t be in major rush to pay off with rate <3. We can easily have 25k tied up for a year, but question if worth it with terrible CD rate with nominal reduced mortgage rate. FWIW no other debt, max out retirement, healthy emergency fund. Not sure which direction to take. Thanks for any input!
Your total interest paid on the 2.75% mortgage would be $155,065. Dropping the rate to 2.625% lowers your total interest paid to $147,589, a savings of $7,476. Where else would you plan on holding the $25k that will otherwise be tied up?
vtjon02
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Re: Reduce our mortgage rate for 12 month CD?

Post by vtjon02 »

galawdawg wrote: Fri Sep 11, 2020 4:53 pm
BoomerSooner24 wrote: Fri Sep 11, 2020 4:46 pm Going to be closing soon on our no cost refi, 15 year at 2.75%. Our mortgage broker reached out to us yesterday with an offer to reduce to 2.625 if we opened a $25k 12 month CD earning essentially nothing (~0.1%). Mortgage amount is $700k, home value $1.2M on recent appraisal. Won’t be in major rush to pay off with rate <3. We can easily have 25k tied up for a year, but question if worth it with terrible CD rate with nominal reduced mortgage rate. FWIW no other debt, max out retirement, healthy emergency fund. Not sure which direction to take. Thanks for any input!
Your total interest paid on the 2.75% mortgage would be $155,065. Dropping the rate to 2.625% lowers your total interest paid to $147,589, a savings of $7,476. Where else would you plan on holding the $25k that will otherwise be tied up?
This math strongly supports going along with the plan and locking up the CD for the reduction in rate. But it seems too good to be true. Are you sure that it doesn't require holding the CD for the life of the mortgage, but that the CD renews in one year increments?
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Kevin M
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Re: Reduce our mortgage rate for 12 month CD?

Post by Kevin M »

I come up with a difference in payments over 15 years of $7,475, so essentially agree with first reply.

The 15-year Treasury yield is about 1%, and the highest rate I see on a 10-year direct CD is 1.40%. Let's be generous and say you could earn 1.5% on the $25K over the next 15 years.

If you take the deal, you earn $25 in the first year, you reinvest the $20,025 at the assumed rate, and you end up with $30,825. If you invest the $25K now at the assumed rate, instead of taking the deal, you earn $31,256, so $431 more. The amount you save with the deal is a lot more than the extra you earn by investing the $25K for an additional year at 1.5%.

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MikeG62
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Re: Reduce our mortgage rate for 12 month CD?

Post by MikeG62 »

BoomerSooner24 wrote: Fri Sep 11, 2020 4:46 pm Going to be closing soon on our no cost refi, 15 year at 2.75%. Our mortgage broker reached out to us yesterday with an offer to reduce to 2.625 if we opened a $25k 12 month CD earning essentially nothing (~0.1%). Mortgage amount is $700k, home value $1.2M on recent appraisal. Won’t be in major rush to pay off with rate <3. We can easily have 25k tied up for a year, but question if worth it with terrible CD rate with nominal reduced mortgage rate. FWIW no other debt, max out retirement, healthy emergency fund. Not sure which direction to take. Thanks for any input!
It’s unclear to me whether this is for the first 12 months of the mortgage or whether you can keep rolling over the CD and getting the 12.5bp reduction on the mortgage rate for up to the full term of the mortgage? Or do you get the 12.5bp reduction for the full mortgage term simply for opening a 12-month CD (i.e., you can move he funds at maturity and still qualify for the lower rate). Can you clarify?
Last edited by MikeG62 on Sat Sep 12, 2020 5:47 am, edited 1 time in total.
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softwaregeek
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Re: Reduce our mortgage rate for 12 month CD?

Post by softwaregeek »

Typical relationship mortgage deal. Take it, you can leave after the cd is done.
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anon_investor
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Re: Reduce our mortgage rate for 12 month CD?

Post by anon_investor »

BoomerSooner24 wrote: Fri Sep 11, 2020 4:46 pm Going to be closing soon on our no cost refi, 15 year at 2.75%. Our mortgage broker reached out to us yesterday with an offer to reduce to 2.625 if we opened a $25k 12 month CD earning essentially nothing (~0.1%). Mortgage amount is $700k, home value $1.2M on recent appraisal. Won’t be in major rush to pay off with rate <3. We can easily have 25k tied up for a year, but question if worth it with terrible CD rate with nominal reduced mortgage rate. FWIW no other debt, max out retirement, healthy emergency fund. Not sure which direction to take. Thanks for any input!
Is there a penalty for terminating the CD early?
softwaregeek
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Re: Reduce our mortgage rate for 12 month CD?

Post by softwaregeek »

Probably not. But the broker commission will probably get dinged which means you won’t have access to that broker again. Repeat business gets the best deals.
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BoomerSooner24
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Re: Reduce our mortgage rate for 12 month CD?

Post by BoomerSooner24 »

Really appreciate all replies. If I didn’t do CD, would place the funds into taxable as a little overloaded in cash at the moment with some bonus payments. The deal only requires me to keep the CD for 12 mo and can then get out and maintain the same rate for the duration of the mortgage. Not sure on early termination penalty, but would not need access to the funds over that time period. So it sounds like opening the CD and taking the reduction is the move I’ll be making. Thanks again to all!
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