Torn on whether or not to refi 30yr to 15yr

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K-SawDude
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Torn on whether or not to refi 30yr to 15yr

Post by K-SawDude » Wed Dec 21, 2011 12:28 am

Hi all,

I'm hoping to get some reactions from Bogleheads as to whether or not I should refi now. I'm literally changing my mind every other couple of days trying to figure out which option--either keeping the current 30yr loan or refi-ing to 15yr--makes the most financial sense. I really don't think rates can drop much lower, so it seems like now's the time to decide on whether or not to pull the trigger.

The details:

House value: $175K (based on likely comps, though don't know for sure until I get an appraisal)
Current principal: $160K
Interest rate: 5%
Term: 30 years, currently 1.5 years into payments
MI: $66/month (FHA--will need to pay it for another 3.5 years and then removable)
Other info: Making an additional monthly payment per year comfortably. On schedule to be paid off after 24 years total.
Monthly P+I+ MI = $951; With additional monthly payment, monthly average = $1025

Most likely refi scenario:

Interest rate: 3.5%
Term: 15 years FHA
MI: $33/month, AS LONG AS I'm under 90% LTV (and removable as soon as I hit 78% LTV)
No closing costs
Monthly P+I+MI= $1181

Notes:
(1) I can comfortably afford the refi payment, particularly only doing 12 payments a year. (It's only about $155 more a month for the 15 year.)
(2) I'm relatively young (34), with no plans to move and with a very stable job.
(3) I can't consider conventional loans since I live in a condo and don't have enough of a down payment to get this down to 78% LTV without raiding my emergency funds.
(4) As far as deductibility goes, I'm in the 25% tax bracket.

This seems like a no-brainer to do. But then I worry a bit about losing the benefits of extra liquidity, inflation hedging, and long-term investment potential with the 30 year loan. I am NOT currently maxing out all of my Roth space, though I am putting in up to the company match into a 401K.

What would you guys do if you were in my shoes?

P.S. I can't refi into another 30 year FHA loan without having to pay *double* the monthly MI AND resetting the clock for paying it for 5 years. Doesn't make sense to do that, though I wish that were an option.

Manbaerpig
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Re: Torn on whether or not to refi 30yr to 15yr

Post by Manbaerpig » Wed Dec 21, 2011 1:33 am

15 sounds affordable to you: though see if you can do better than a 3.5/no-cost, last I looked you should be able to get under that... but maybe it's a LTV issue :beer

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Re: Torn on whether or not to refi 30yr to 15yr

Post by sunnyday » Wed Dec 21, 2011 1:41 am

If it were me and those were my only 2 options, I'd refinance. A 1.5% difference in interest is too significant to pass up. Punch the numbers into an amortization table and take a look at how much you'll save in interest over the next couple of years by refinancing.

K-SawDude
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Re: Torn on whether or not to refi 30yr to 15yr

Post by K-SawDude » Wed Dec 21, 2011 1:42 am

Manbaerpig wrote:15 sounds affordable to you: though see if you can do better than a 3.5/no-cost, last I looked you should be able to get under that... but maybe it's a LTV issue :beer
Thanks for the feedback. Any suggestions for places to shop around? (I should have mentioned that I got the quote above from Amerisave.)

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Re: Torn on whether or not to refi 30yr to 15yr

Post by sunnyday » Wed Dec 21, 2011 1:48 am

K-SawDude wrote:
Manbaerpig wrote:15 sounds affordable to you: though see if you can do better than a 3.5/no-cost, last I looked you should be able to get under that... but maybe it's a LTV issue :beer
Thanks for the feedback. Any suggestions for places to shop around? (I should have mentioned that I got the quote above from Amerisave.)
I'm a big fan of the no-cost refi too. As far as shopping around, I'd call as many banks and mortgage brokers as you can. Once you get the best deal, call your the bank that your current mortgage is through and see if they'll beat the offer (they won't want to lose you as a customer). If they beat the offer, see if the other bank/broker will beat that offer.

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Re: Torn on whether or not to refi 30yr to 15yr

Post by Grt2bOutdoors » Wed Dec 21, 2011 10:41 am

If you can afford the extra $155 per month, I'd refinance in a flash, especially if you can get a no-cost option.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Torn on whether or not to refi 30yr to 15yr

Post by guitarguy » Wed Dec 21, 2011 1:01 pm

K-SawDude wrote: P.S. I can't refi into another 30 year FHA loan without having to pay *double* the monthly MI AND resetting the clock for paying it for 5 years. Doesn't make sense to do that, though I wish that were an option.
This is the boat I'm in. What's the deal with the double MI costs?? I'm about 2 years into my FHA loan paying 5.125%.

I'm also thinking about looking into a 15 year, but how does the LTV fit in? Can anyone tell me if one can "Streamline" (which doesn't take into account LTV) from a 30-yr into a 15-yr?? My original loan amount was $106k and my balance is just over $100k now. House value is about $80k or so.

The only difference between me and the OP is that I am maxing my Roth space. Not sure if the increase in monthly payment from 30 to 15 year would be too high a decrease in monthly cash flow.
Last edited by guitarguy on Wed Dec 21, 2011 1:05 pm, edited 1 time in total.

Manbaerpig
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Re: Torn on whether or not to refi 30yr to 15yr

Post by Manbaerpig » Wed Dec 21, 2011 1:04 pm

I had luck with first indiana bank, others here have too...


www.firstib.com

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HardKnocker
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Re: Torn on whether or not to refi 30yr to 15yr

Post by HardKnocker » Wed Dec 21, 2011 1:14 pm

Go 15 if you can swing the payment comfortably.
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epilnk
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Re: Torn on whether or not to refi 30yr to 15yr

Post by epilnk » Wed Dec 21, 2011 1:19 pm

I tend to be a fan of 30s for liquidity reasons, and usually advocate that disciplined homeowners take the longer term and self amortize. In your case, however, I would go with the 15. It's a much better loan, it reduces the burden of those pesky MI fees, and you can comfortably afford it.

trico
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Re: Torn on whether or not to refi 30yr to 15yr

Post by trico » Wed Dec 21, 2011 1:38 pm

I am in the camp of paying off your mortgage all together. 20 years ago I had a 30 year mortgage and started paying an extra payment to lower it to a 15 year. I tried to invest my money instead of useing this money to pay off the mortgage. I wish I would paid it off. Take every penny you can get our little mitts on and pay it off. Even if you have to sell your life insurance, beg, borrow, or steal, pay this off asap.

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Re: Torn on whether or not to refi 30yr to 15yr

Post by LadyGeek » Wed Dec 21, 2011 1:58 pm

I just refinanced from a 30 yr to 15 yr fixed with Penfed. The OP's reluctance is concern for the long-term - IRA, 401k, inflation risk, etc.

Look at it this way - your mortgage is a guaranteed sure thing. You can't predict what will happen in 30 years, let alone 5. Go for it. As for depleting your emergency fund - is it a significant chunk,or, something that can be made up in a few months? A temporary drop is OK - that's why you have one.
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Watty
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Re: Torn on whether or not to refi 30yr to 15yr

Post by Watty » Wed Dec 21, 2011 2:44 pm

What would you guys do if you were in my shoes?

P.S. I can't refi into another 30 year FHA loan without having to pay *double* the monthly MI AND resetting the clock for paying it for 5 years. Doesn't make sense to do that, though I wish that were an option.

$33 a month is about a quarter of a point so if you could refinance to a 4% 30 year loan that would net out to being about the same as a 4.25% loan for the next few years then once you got off of the MI the interest rate would effectively drop. That isn't ideal but it sure isn't a deal killer, especially if you can do a no cost refinance to a new 30 year loan.


If you can do this then personally if I were 34 and in the 25% tax bracket I would probably go with a no cost refinance into the 30 year mortgage at around 4% if I could, but I would contribute the difference and any tax savings to the 401K. It isn't guaranteed that the 401K will outperform the 4% mortgage over the long term but realistically if your 401K doesn't perform better than 4% over the next 20 years, then that will be pretty dire situation and you would want as much in the 401k as possible anyway. If the economy does stay bad for 20 years then I would also suspect that a lot more people will be out of jobs so having as small a mortgage payment as possible would also be good in case you lose yours.

The other factor that cannot reliably be predicted is future inflation. With the way money is being created I don't think anyone would be surprised if inflation gets significantly higher than 4% in the near future. If that happens then having a longer term loan is like money in the bank.

K-SawDude
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Re: Torn on whether or not to refi 30yr to 15yr

Post by K-SawDude » Wed Dec 21, 2011 7:39 pm

guitarguy wrote:
K-SawDude wrote: P.S. I can't refi into another 30 year FHA loan without having to pay *double* the monthly MI AND resetting the clock for paying it for 5 years. Doesn't make sense to do that, though I wish that were an option.
This is the boat I'm in. What's the deal with the double MI costs?? I'm about 2 years into my FHA loan paying 5.125%.

I'm also thinking about looking into a 15 year, but how does the LTV fit in? Can anyone tell me if one can "Streamline" (which doesn't take into account LTV) from a 30-yr into a 15-yr?? My original loan amount was $106k and my balance is just over $100k now. House value is about $80k or so.

The LTV for FHA loans impacts the amount of monthly mortgage insurance. If you're under the 90% threshold, you pay half as much as you do for over the 90% threshold. More can be found here:
http://www.alberhillranch.com/blog/?p=42

FHA mortgage insurance varies by loan term, and by loan-to-value and, beginning April 18, 2011, the new insurance premiums are as follows:

15-year loan term, loan-to-value > 90% : 0.50% per year
15-year loan term, loan-to-value <= 90% : 0.25% per year
30-year loan term, loan-to-value > 95% : 1.15% per year
30-year loan term, loan-to-value <= 95% : 1.10% per year
Streamlines unfortunately cannot be done from 30 year to 15 year. I've tried to do it with multiple lenders. I really think that, for borrowers with solid credit, they need to modify the streamline rules to allow for reduction of term and to maintain the same level of mortgage insurance pre- to post- refinance. You're under the same umbrella of FHA backing, so why do you need to reset a 5 year minimum and double the rates? Sheesh...
Manbaerpig wrote:I had luck with first indiana bank, others here have too...

http://www.firstib.com

I tried them today and, as nice as they could be, they told me they flat out wouldn't refi on a condo. (!!!) Oh well . . .
LadyGeek wrote:I just refinanced from a 30 yr to 15 yr fixed with Penfed. The OP's reluctance is concern for the long-term - IRA, 401k, inflation risk, etc.

Look at it this way - your mortgage is a guaranteed sure thing. You can't predict what will happen in 30 years, let alone 5. Go for it. As for depleting your emergency fund - is it a significant chunk,or, something that can be made up in a few months? A temporary drop is OK - that's why you have one.
It shouldn't require too much of the emergency fund, unless I have a crazy low appraisal or something. I also have some back-up emergency funds, I suppose (some in Roth space and some I-bonds), so I have a bit to work with from savings.
Watty wrote:$33 a month is about a quarter of a point so if you could refinance to a 4% 30 year loan that would net out to being about the same as a 4.25% loan for the next few years then once you got off of the MI the interest rate would effectively drop. That isn't ideal but it sure isn't a deal killer, especially if you can do a no cost refinance to a new 30 year loan.

I take your points regarding the possibility of significant inflation moving forward. A 15 year would provide some protection, but you're right that a 30 year would be ideal (in a hyperinflation environment).

Your proposal for the 30 year (and investing "leftover" money) is a good one. 30 year FHA won't work (because of the problems mentioned above regarding the more-than-doubling of the monthly MI), but 30 year conventional may be worth considering. I may be limited because I'm in a condo, but I'm going to check on this possibility as well.

Update: After an admittedly cursory look at Amerisave's rates on the 30 years, all the refis require over $90/month MI (!!!). That's even for loans less than 90% LTV. The 15 years weren't much better. It really seems like conventional works best as an option for those with less than 80% LTV. I'm also a fan of how FHA does MI removal: On 15 year loans, it's automatically removed after you hit 78% LTV. With conventional, I was told (by Wells Fargo) that PMI could possibly be removed if I put in a formal request AND pay for an appraisal to prove that I'm under LTV. I don't want to deal with that foolishness, especially if we're still in a pseudo-deflationary mode in a couple of years.
Last edited by K-SawDude on Wed Dec 21, 2011 8:06 pm, edited 2 times in total.

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Re: Torn on whether or not to refi 30yr to 15yr

Post by Toons » Wed Dec 21, 2011 7:45 pm

"Interest rate: 3.5% ,Term: 15 years FHA'
Lock in ,you say you can afford it :D
Punch some numbers in the amortization schedule link below ,check out the interest you WONT be paying when you re-fi for 15 years,rather than 30.


http://www.bankrate.com/calculators/mor ... lator.aspx
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Rodc
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Re: Torn on whether or not to refi 30yr to 15yr

Post by Rodc » Thu Dec 22, 2011 9:08 am

An alternative is to refi to a lower rate 30-year and pay at the 15-year monthly rate.

You will pay a little more interest than the 15-year refi, but far less than a 30-year refi & 30 year pay off and you retain flexibly in your cash flow.

If nothing else working these numbers will show you the true trade-off in cash flow vs interest payments.

Also, unless you really think you will be in the same house for 30 years, and will never accelerate payments, comparing the interest paid over 15 years to 30 years does not mean anything. Pick a couple of guesses as to how long you will be in the house (say you want to move in 5 years, but might stay as long as 15, or whatever) if you want to play that game.

Added: Plugged numbers into calculator. If you did a 30-year at 4%, but wanted to pay off in 15 years you would pay $1220 per month, if you got a 15-year at 3.5%, the monthly payment would be $1179. Flexibility of being able to cut back in tight months costs you $59 per month. Whether worthwhile is or not is a personal choice.

If you stay in the house for 5 years that is an extra cost of $3,540, 10 years would double that.
Last edited by Rodc on Thu Dec 22, 2011 10:27 am, edited 1 time in total.
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Re: Torn on whether or not to refi 30yr to 15yr

Post by Watty » Thu Dec 22, 2011 9:51 am

Update: After an admittedly cursory look at Amerisave's rates ....

Since your situation is a bit complex and your current interest rate isn't all that bad you might want to use a mortage broker that might be able to help you find a refinance that will work for you, or at least help you feel comfortabel about not refinancing.


If you can't find a no cost refiance and it will end up costing you a couple of thousand dollars to refinance, then it might work better to just use that couple of thousand dollars to pay down your mortage so that you can get out of paying the mortage insurance sooner.

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Re: Torn on whether or not to refi 30yr to 15yr

Post by Dandy » Thu Dec 22, 2011 4:09 pm

Cut the rate from 5 to 3.5 and the term from 30 to 15yrs is hard to pass up. If you have a decent emergency fund, job stability and don't plan to move and like where you live -- sounds like a no brainer. Hopefully, future raises will allow you to consider even some pre pay on the new loan.

To own your place paid off at 50 is a great place to be. My main concern is that this is a condo. I am a little wary of condo's since they don't seem to hold their value as well as individual houses. But if it is in a good location and well maintained that may not be a problem.

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Re: Torn on whether or not to refi 30yr to 15yr

Post by ilmartello » Thu Dec 22, 2011 5:26 pm

There is no way you shouldn't refi.
My only objection is to choosing a no-cost mortgage unless you are cash-poor.
YOU know why?
THERE IS NO SUCH THING AS A NO-COST REFINANCE.
Even if your closing costs are 0 , you are paying for the refinance with a higher interest rate and more interest in your payments. And it's a really inefficient thing to do since the closing costs you have to pay on a refinance aren't prohibitive.
It's not neccesary to buy points, but pay your own closing costs.

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Re: Torn on whether or not to refi 30yr to 15yr

Post by Rodc » Fri Dec 23, 2011 9:40 am

ilmartello wrote:There is no way you shouldn't refi.
My only objection is to choosing a no-cost mortgage unless you are cash-poor.
YOU know why?
THERE IS NO SUCH THING AS A NO-COST REFINANCE.
Even if your closing costs are 0 , you are paying for the refinance with a higher interest rate and more interest in your payments. And it's a really inefficient thing to do since the closing costs you have to pay on a refinance aren't prohibitive.
It's not neccesary to buy points, but pay your own closing costs.
I would caution against a blanket statement like that.

One needs to run the numbers.

Personally, from experience (mine and others), often no cost is exactly the way to go. Many people end up doing a refi, then a few years later doing it again or moving (job change, bigger house, whatever). Over the last five years or so many people did a refi to a great low rate only to find a year later that the rate was lower still and did a refi again. Frequently people never get to the long term with a given mortgage and most of the fee paid to get a lower rate is extra cost for little to no benefit.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Torn on whether or not to refi 30yr to 15yr

Post by ilmartello » Fri Dec 23, 2011 1:59 pm

i am going to assume the breakeven point is less than a few years, do you think rates can get any lower?

Rodc
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Re: Torn on whether or not to refi 30yr to 15yr

Post by Rodc » Fri Dec 23, 2011 2:44 pm

ilmartello wrote:i am going to assume the breakeven point is less than a few years, do you think rates can get any lower?
Rather than assume one should run the numbers and use what is. Answer will depend on just how much you are willing to pay upfront.

Many people in the recent past voted no, only to find they were wrong.

What rates will do I do not know. My last refi was no cost was 30 year fixed at 4.1%.

If it gets much below 4% at no cost I will do it for a third time.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Torn on whether or not to refi 30yr to 15yr

Post by ilmartello » Fri Dec 23, 2011 7:28 pm

Rodc wrote:
ilmartello wrote:i am going to assume the breakeven point is less than a few years, do you think rates can get any lower?
Rather than assume one should run the numbers and use what is. Answer will depend on just how much you are willing to pay upfront.

Many people in the recent past voted no, only to find they were wrong.

What rates will do I do not know. My last refi was no cost was 30 year fixed at 4.1%.

If it gets much below 4% at no cost I will do it for a third time.
Here's a standard loan 50 percent ltv, prime credit, waive escrows, primary residence, 200 loan on 400k

http://www.amerisave.com/rate-results?W ... D=43534961

With a rate of 3.875. you have closing costs of 1938 and a monthly payment of $940.00
A no cost refi pushes your rate up to 4.125 and your payment is 969.00

a break even point of 5 1/2 years.

------

I would put up the closing cost and figure you're not going to refi in the next 5 years.

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Re: Torn on whether or not to refi 30yr to 15yr

Post by Rodc » Fri Dec 23, 2011 8:58 pm

ilmartello wrote:
Rodc wrote:
ilmartello wrote:i am going to assume the breakeven point is less than a few years, do you think rates can get any lower?
Rather than assume one should run the numbers and use what is. Answer will depend on just how much you are willing to pay upfront.

Many people in the recent past voted no, only to find they were wrong.

What rates will do I do not know. My last refi was no cost was 30 year fixed at 4.1%.

If it gets much below 4% at no cost I will do it for a third time.
Here's a standard loan 50 percent ltv, prime credit, waive escrows, primary residence, 200 loan on 400k

http://www.amerisave.com/rate-results?W ... D=43534961

With a rate of 3.875. you have closing costs of 1938 and a monthly payment of $940.00
A no cost refi pushes your rate up to 4.125 and your payment is 969.00

a break even point of 5 1/2 years.

------

I would put up the closing cost and figure you're not going to refi in the next 5 years.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: Torn on whether or not to refi 30yr to 15yr

Post by Rodc » Fri Dec 23, 2011 9:01 pm

ilmartello wrote:
Rodc wrote:
ilmartello wrote:i am going to assume the breakeven point is less than a few years, do you think rates can get any lower?
Rather than assume one should run the numbers and use what is. Answer will depend on just how much you are willing to pay upfront.

Many people in the recent past voted no, only to find they were wrong.

What rates will do I do not know. My last refi was no cost was 30 year fixed at 4.1%.

If it gets much below 4% at no cost I will do it for a third time.
Here's a standard loan 50 percent ltv, prime credit, waive escrows, primary residence, 200 loan on 400k

http://www.amerisave.com/rate-results?W ... D=43534961

With a rate of 3.875. you have closing costs of 1938 and a monthly payment of $940.00
A no cost refi pushes your rate up to 4.125 and your payment is 969.00

a break even point of 5 1/2 years.

------

I would put up the closing cost and figure you're not going to refi in the next 5 years.
So if rates get pushed 0.5% lower over the next 18 months to try to get the housing market moving better, say because the recovery stalls, there is an election, etc, and you want to refi, you wasted your money. Or you have a job change in 3 years. Whatever.

It might make sense. It might not. Blanket statements don't hold. One has to look at their particular situation.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

tj
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Re: Torn on whether or not to refi 30yr to 15yr

Post by tj » Sat Dec 24, 2011 1:14 pm

I re-fied from a 30 year 5.25% to 15 year 3.625%, no costs.

I got to get escrow fees waived in the process, which allowed me to take an extra prop tax payment deduction this year. :)

I'm very happy I did....

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Re: Torn on whether or not to refi 30yr to 15yr

Post by epilnk » Sat Dec 24, 2011 1:36 pm

ilmartello wrote:There is no way you shouldn't refi.
My only objection is to choosing a no-cost mortgage unless you are cash-poor.
YOU know why?
THERE IS NO SUCH THING AS A NO-COST REFINANCE.
Even if your closing costs are 0 , you are paying for the refinance with a higher interest rate and more interest in your payments. And it's a really inefficient thing to do since the closing costs you have to pay on a refinance aren't prohibitive.
It's not neccesary to buy points, but pay your own closing costs.
We are not cash poor. We've done several refis, all but one no-cost. We did pay our own closing costs the first time, but now we know to do the math first.

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