Mortgage refinance options

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Topic Author
Investing Newbie
Posts: 106
Joined: Sun Jun 22, 2008 1:27 pm

Mortgage refinance options

Post by Investing Newbie » Mon Jun 10, 2019 7:15 am

Good morning everyone,

I'm just shy of 5 years into a 30 year fixed rate mortgage with an interest rate of 4.75%. I've been paying $300 extra a month so as to pay the equivalent of 13 months of payments in a given 12 months period. This was the advice I was given at the time. I intended to do this until the loan was down to 80% LTV and then refinance, but I was unaware at the time that this loan was lender paid PMI and the interest rate is locked in at 4.75% and I need to refinance in order to have the interest rate dropped.

Mortgage rates have significantly declined since the time my mortgage originated. I found a rate of 2.75% for a fixed 15 year term through a local credit union. The online shops don't even seem able to match this rate.

Here are my questions:

1. 15 vs 20 vs 30 year term: Due to a combination of decreased interest rates and amount that has been paid down on the loan to date, the 15 year payment will be essentially identical to the current amount I'm paying per month. It will save approx $80k over the life of the loan. This seems like the answer to me, but I often see it recommended on this forum to go with a 20 or 30 year and pay it off as if it were 15, with the flexibility to decrease payments if needed due to an unforeseen circumstance. An additional benefit of the 15 year is that the mortgage will be paid off around the time my kids start college.

2. No cost refinance vs paying costs upfront. The no cost obviously comes with a higher rate than the other. We have no intention of moving and this is very likely a forever home. Family in the area, good public schools, etc. Paying the costs up front makes sense to me in this situation.

3. Points vs no points. My current lender has a 15 year rate of 3% with points if I were to refinance with them. I would like to avoid points, but does it seem possible that they'd "eat" the closing costs if I refinanced with them, possibly cancelling out the costs of the points. I plan on speaking with them in the next couple of days to discuss.

4. Escrow vs not. My monthly payment currently consists of principal and interest and an escrow payment for home owner insurance and property taxes. The other posts I've read seem to prefer no escrow. I suppose "paying" the escrow payment each month on my own into a high yield online account would work out more favorably?

Thank you for your time.

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rocket354
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Re: Mortgage refinance options

Post by rocket354 » Mon Jun 10, 2019 8:31 am

1) What are the rates for those other loans? How stable is your employment? How big of a payment is your mortgage relative to your income?

2&3) Both costs that affect the rate. Your plans change. How certain are you to stay in the house long-term? But, again, specific numbers are important. How much would you have to spend to reduce the rate by how much on how big of a mortgage?

4) I was once told by a lender--don't know if it's true or not--that planning to pay through escrow actually helps keep the rate a touch lower. All else being equal avoiding escrow is likely your better bet, by a small amount. Buy if it costs you 1/8th on your mortgage rate, it's likely not.

chevca
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Re: Mortgage refinance options

Post by chevca » Mon Jun 10, 2019 8:50 am

Investing Newbie wrote:
Mon Jun 10, 2019 7:15 am
Mortgage rates have significantly declined since the time my mortgage originated. I found a rate of 2.75% for a fixed 15 year term through a local credit union. The online shops don't even seem able to match this rate.
Not much to discuss. If you can afford the payment on this 15 year mortgage, I'd go with that. You would drop 2% off you rate and knock the mortgage down to a 15 year term. If you plan to pay it off early and this is affordable, why not? I probably wouldn't even pay that one down any, just pay it on schedule.

Many like to get a 30 year to have the lower payment if things get tight some month or whatever. I can agree with that. If one can afford the 15 year monthly payment easily though, I say go with that any time over a 30 year.

Topic Author
Investing Newbie
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Re: Mortgage refinance options

Post by Investing Newbie » Mon Jun 10, 2019 8:55 am

rocket354 wrote:
Mon Jun 10, 2019 8:31 am
1) What are the rates for those other loans? How stable is your employment? How big of a payment is your mortgage relative to your income?

20 year rate with no closing costs is 3.875%
20 year with closing costs 3.375%
30 year with closing costs 3.5%
Employment is very stable. Current mortgage with Principal and interest and escrow is 10% of our gross monthly income

2&3) Both costs that affect the rate. Your plans change. How certain are you to stay in the house long-term? But, again, specific numbers are important. How much would you have to spend to reduce the rate by how much on how big of a mortgage?

Very certain this will be long term. I'm not sure I understand your other questions.

4) I was once told by a lender--don't know if it's true or not--that planning to pay through escrow actually helps keep the rate a touch lower. All else being equal avoiding escrow is likely your better bet, by a small amount. Buy if it costs you 1/8th on your mortgage rate, it's likely not.

I will need to find out if not paying into escrow is even an option. I don't ever remember it being discussed with my first mortgage, but then again I was very unfamiliar with the whole process.
Sorry, I can't figure out how to answer the questions under the quoted text, so my responses may not be apparent.

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rocket354
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Re: Mortgage refinance options

Post by rocket354 » Mon Jun 10, 2019 9:59 am

Since current PITI is already low, 10% of your gross, it's hard to imagine much benefit to paying 0.75 more for a 30-year note. There's not much flexibility gained going 10%->7%; it would have to be a very specific cataclysmic event for that decision to be beneficial, and you're paying a lot for that insurance.

If you can refi to 2.75% 15-year, you effectively get the same house for 10 fewer years of the same payment. Go with the 15-year and be happy. Just make sure the rest of your finances are in order and you don't have to worry about "flexibility."

chevca
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Re: Mortgage refinance options

Post by chevca » Mon Jun 10, 2019 10:09 am

Yes, if PITI is that low a percentage of your income and you plan to stay long term, get a 15 year mortgage at the lowest rate for sure. That's easily your best plan here, IMO.

chevca
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Re: Mortgage refinance options

Post by chevca » Mon Jun 10, 2019 10:10 am

What is the deal with the 2.75% 15 year mortgage? That's the one we should be discussing here.

Topic Author
Investing Newbie
Posts: 106
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Re: Mortgage refinance options

Post by Investing Newbie » Mon Jun 10, 2019 9:14 pm

Do closing costs of approx $10,000 for $400,000 refinance seem within range? My research shows 1-2% fee, so this looks a bit high.

Thoughts? Could this low rate be misleading and then I would get hit with high closing costs?

HEDGEFUNDIE
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Re: Mortgage refinance options

Post by HEDGEFUNDIE » Mon Jun 10, 2019 9:42 pm

Investing Newbie wrote:
Mon Jun 10, 2019 9:14 pm
Do closing costs of approx $10,000 for $400,000 refinance seem within range? My research shows 1-2% fee, so this looks a bit high.

Thoughts? Could this low rate be misleading and then I would get hit with high closing costs?
You should have a Loan Estimate listing each closing cost individually. Post it here and we can comment on what looks high.

Topic Author
Investing Newbie
Posts: 106
Joined: Sun Jun 22, 2008 1:27 pm

Re: Mortgage refinance options

Post by Investing Newbie » Mon Jun 10, 2019 9:56 pm

Credit union origination charge: 2485
application fee: 100
committment fee: 1990
processing fee: 395

Required services they select: 1328.54
appraisal fee: 450
attorney fee: 750
credit report fee: 42.54
flood determination: 10
tax service fee: 76

Required services I select: 2088.97
title: endorsement: survey: 50
title: title closer fee: 300
title: title insurance: 1738.97

Goverment recording charges: 915

Transfer taxes: 3184

All adds up to a total of $10,001.51

Estimated cash to bring to close: $20,000

HEDGEFUNDIE
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Re: Mortgage refinance options

Post by HEDGEFUNDIE » Mon Jun 10, 2019 10:20 pm

Investing Newbie wrote:
Mon Jun 10, 2019 9:56 pm
Credit union origination charge: 2485
application fee: 100
committment fee: 1990
processing fee: 395
These are the fees that I would try to negotiate away.

mortfree
Posts: 1624
Joined: Mon Sep 12, 2016 7:06 pm

Re: Mortgage refinance options

Post by mortfree » Mon Jun 10, 2019 10:24 pm

If the rate is 2.75% and has those fees, what is the APR?

EasyPeasy17
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Re: Mortgage refinance options

Post by EasyPeasy17 » Tue Jun 11, 2019 7:19 am

Those closing costs seem quite high - almost like paying for points. The bank is tacking on a lot of fees.

I am refinancing close to 600K. My costs are below:

Loan origination: $995

Services you cannot shop for: $644
Appraisal Fee: 550
Credit report fee: 19
Flood Certification: 5
Tax related service: 70

Services you can shop for: Total $1300
Title closing fee: 550
Title closing protection letter fee: 25
Title lenders coverage premium: 725

Taxes & Government fees: Total $108

Total Costs: 3,047. My bank is giving me a $1177 credit so my cost will be $1870.00. That does not include the prepaid interest for the month.

I would try to negotiate with them or see if you can get a higher rate with less fees. I would shop around for title insurance as well as I bet you can do better.

chevca
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Joined: Wed Jul 26, 2017 11:22 am

Re: Mortgage refinance options

Post by chevca » Tue Jun 11, 2019 11:15 am

Yikes, the closing costs do seem a bit high on that one, OP. A "commitment fee" of almost $2000?? On top of the origination fee, which seems high? Unfortunately, it looks like the tax cost will be high no matter what for you.

What's the commitment fee for anyway? I could see if you were building a house and it could be months out before closing, they want you to commit so as not to jump ship later on. But, it's a refi... you either want it ASAP or you don't. It's not a, let me mull this over for a couple months deal. That seems sketchy to me, but maybe that's a state thing where you are. Ask if that can go away.

As suggested, comparing the APRs might be the next best step. If the APR on this 2.75% one is about the same as the higher rate ones, it may not be that great a deal.

cherijoh
Posts: 5739
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Mortgage refinance options

Post by cherijoh » Tue Jun 11, 2019 12:01 pm

Investing Newbie wrote:
Mon Jun 10, 2019 7:15 am
1. 15 vs 20 vs 30 year term: Due to a combination of decreased interest rates and amount that has been paid down on the loan to date, the 15 year payment will be essentially identical to the current amount I'm paying per month. It will save approx $80k over the life of the loan. This seems like the answer to me, but I often see it recommended on this forum to go with a 20 or 30 year and pay it off as if it were 15, with the flexibility to decrease payments if needed due to an unforeseen circumstance. An additional benefit of the 15 year is that the mortgage will be paid off around the time my kids start college.
I think this advice mostly applies to someone buying a new house and being overly gung-ho about paying off the loan when they really have no experience fitting an extra x hundreds of dollars into their budget. You have years of experience making this amount of payment and if it hasn't stressed you yet, I would go with the 15-yr loan. The fact that you've been able to make extra principal payments supports the notion that you aren't house poor. These days I think there is about a 0.675% interest rate differential between 15- and 30-yr loans. That is a substantial advantage that I would be loath to give up in your circumstances when you likely don't need the extra flexibility.

My one caveat would be if you have been neglecting retirement savings in tax-advantaged plans to pay down your mortgage more quickly. If that is the case, then get a longer term mortgage and use the cash flow to catch up on retirement savings. But if you are maxing out your 401k and Roth accounts, then you can ignore this last piece of advice.

Investing Newbie wrote:
Mon Jun 10, 2019 7:15 am
2. No cost refinance vs paying costs upfront. The no cost obviously comes with a higher rate than the other. We have no intention of moving and this is very likely a forever home. Family in the area, good public schools, etc. Paying the costs up front makes sense to me in this situation.
If you have the money to pay the closing costs, I agree that is a good way to go.

Investing Newbie wrote:
Mon Jun 10, 2019 7:15 am
3. Points vs no points. My current lender has a 15 year rate of 3% with points if I were to refinance with them. I would like to avoid points, but does it seem possible that they'd "eat" the closing costs if I refinanced with them, possibly cancelling out the costs of the points. I plan on speaking with them in the next couple of days to discuss.
Use one of the mortgage calculators to compare loan options. In addition to monthly payments look at interest paid over the life of the loan and the point at which amount owed on different options is equal. If comparing a loan with points to one without I'd credit the one without points as though you threw in the cash and borrowed less.

Investing Newbie wrote:
Mon Jun 10, 2019 7:15 am
4. Escrow vs not. My monthly payment currently consists of principal and interest and an escrow payment for home owner insurance and property taxes. The other posts I've read seem to prefer no escrow. I suppose "paying" the escrow payment each month on my own into a high yield online account would work out more favorably?
I seriously doubt you need the extra discipline of escrow, so I'd go no escrow and put it in an online savings account.

cherijoh
Posts: 5739
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Mortgage refinance options

Post by cherijoh » Tue Jun 11, 2019 12:26 pm

Investing Newbie wrote:
Mon Jun 10, 2019 9:56 pm
Credit union origination charge: 2485
application fee: 100
committment fee: 1990
processing fee: 395

Required services they select: 1328.54
appraisal fee: 450
attorney fee: 750
credit report fee: 42.54
flood determination: 10
tax service fee: 76

Required services I select: 2088.97
title: endorsement: survey: 50
title: title closer fee: 300
title: title insurance: 1738.97

Goverment recording charges: 915

Transfer taxes: 3184

All adds up to a total of $10,001.51

Estimated cash to bring to close: $20,000
It sounds like no one can touch the 2.75% rate because they are being compensated by extra fees. I'd look at other 15-year mortgages and see how the fees compare. Some of the charges like gov't recording charges and transfer fees will apply to you no matter what; someone living elsewhere may be hit with minimal fees in this category. :annoyed

When was your last revaluation for property taxes and how much is the loan relative to that amount? I was able to get a HELOC lender to waive the appraisal fee because my home had been reevaluated within a few months of when I applied and my mortgage + maximum draw on the HELOC came in at less than 60% of loan to value IIRC. NOTE this was before the housing crisis and a small regional bank.

Topic Author
Investing Newbie
Posts: 106
Joined: Sun Jun 22, 2008 1:27 pm

Re: Mortgage refinance options

Post by Investing Newbie » Tue Jun 11, 2019 11:00 pm

I contacted my current lender and they offer a 3.25% rate with 0.5 points. Closing costs of $4000, so 40% less than with the credit union.


Over the entire life of the loan the 2.75% rate will obviously cost less, but the breakeven period between these two is probably too long. I tried to play around with mortgage professor to determine which scenario makes the most sense, but couldn't quite get it to work how I wanted.

Topic Author
Investing Newbie
Posts: 106
Joined: Sun Jun 22, 2008 1:27 pm

Re: Mortgage refinance options

Post by Investing Newbie » Wed Jun 12, 2019 9:07 pm

I was able to get the mortgage professor site to load.

The 2.75% with 10K in closing costs comes out ahead by $7k when compared to 3.25% with 0.5 points. The math works out for me to choose the 2.75% loan, but I'm a bit put out by the comments regarding how those fees sound exorbitant.

I assume it makes sense to stick with the math and leave the emotion out of it?

Jags4186
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Re: Mortgage refinance options

Post by Jags4186 » Wed Jun 12, 2019 9:22 pm

Investing Newbie wrote:
Wed Jun 12, 2019 9:07 pm
I was able to get the mortgage professor site to load.

The 2.75% with 10K in closing costs comes out ahead by $7k when compared to 3.25% with 0.5 points. The math works out for me to choose the 2.75% loan, but I'm a bit put out by the comments regarding how those fees sound exorbitant.

I assume it makes sense to stick with the math and leave the emotion out of it?
There is a strong likelihood rates will continue to decrease. If you are refinancing I would not pay a dime to do so. Get a no cost refinance today and then look to refinance again in a few months.

I know not exactly apples to apples but I am closing this week on a 30 year fixed refinance at 3.875% from 4.25%.

Application Fee: $890.00
Title - closing protection letter: $75
Title - Endorsements: $50.00
Title - Lender’s Title Insurance: $812.50
Title - Settlement Services: $375.00
Taxes - Recording Fees: $273.00
Prepaid interest: $334.42

Escrow:
Homeowners Insurance 2 months prepaid: $126.50
Property Taxes 4 months prepaid: $3766.72
“Aggregate adjustment”: -$63.25 (no idea what this is but it’s a negative so I’m not asking questions)

Closing costs: $6,639.89
Lender credit: -$2,625.70
Cash to close: $4014.19

Return of escrow on current loan: $3844.11

Out of pocket refinance costs: $170.08
Break Even: <2 months

Of course I’ll skip 1 months of payments essentially so cash flow wise it’s great. If the Fed cuts rates as everyone thinks I probably can do this again in a few months.

Topic Author
Investing Newbie
Posts: 106
Joined: Sun Jun 22, 2008 1:27 pm

Re: Mortgage refinance options

Post by Investing Newbie » Thu Jun 13, 2019 6:55 am

I’ve thought about not paying closing costs and adding them to loan. My concern is that the interest rate becomes higher in this case and may be stuck paying a higher rate.

What’s the general consensus on paying costs up front be adding them to the loan?

EasyPeasy17
Posts: 6
Joined: Wed Jun 05, 2019 9:50 am

Re: Mortgage refinance options

Post by EasyPeasy17 » Thu Jun 13, 2019 9:43 am

I think it is better to pay them off immediately up front if you can. If you roll them into the loan you will pay interest on them and thus you will pay more.

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