Home Refinance

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Topic Author
raamakoti
Posts: 138
Joined: Mon Jul 31, 2017 10:20 am

Home Refinance

Post by raamakoti » Wed Jul 10, 2019 6:06 am

My current mortgage rate is 3.875% flat for 30 years. 2 years into the orignal mortgage of 340k - now 300k left.
my monthly payment is $1598 with escrow close to $700 more.

I saw this offer - through online lender.
Rate APR Mo. payment Fee
3.625% 3.643% $1,372 $675

$226 in monthly payment reduction.
Is it worth refinancing? Seems like a good deal with initial numbers, but wanted to check with friends here.

PS: yes we are maxing out on our 401ks, Roth IRAs and HSA Savings.

Admiral
Posts: 2109
Joined: Mon Oct 27, 2014 12:35 pm

Re: Home Refinance

Post by Admiral » Wed Jul 10, 2019 7:17 am

raamakoti wrote:
Wed Jul 10, 2019 6:06 am
My current mortgage rate is 3.875% flat for 30 years. 2 years into the orignal mortgage of 340k - now 300k left.
my monthly payment is $1598 with escrow close to $700 more.

I saw this offer - through online lender.
Rate APR Mo. payment Fee
3.625% 3.643% $1,372 $675

$226 in monthly payment reduction.
Is it worth refinancing? Seems like a good deal with initial numbers, but wanted to check with friends here.

PS: yes we are maxing out on our 401ks, Roth IRAs and HSA Savings.
First, just because you see a rate online doesn't mean that's the rate you'll get. You need to have a high credit score to get this teaser rates. That said, you also need to see what ALL the fees are (closing costs, title search, etc). A rate spread that small may not be worth it, and keep in mind you'll be re-amortizing back to a 30 year loan. So, your payment will be smaller, but you will have added two more years of high-interest payments, because loans are front loaded with interest. Use an online amortization calculator to compare the loans.

Side note: How did you manage to pay 40k in principal off in TWO years on a 340k loan? That indicates $1666 of principal paid down per month, on average. That is not possible based on the info you provided.

chevca
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Re: Home Refinance

Post by chevca » Wed Jul 10, 2019 7:46 am

3.875% to 3.625%... no way. The paperwork alone would be too much of a hassle to me for that little of a rate reduction.

It would seem you have been paying down your mortgage aggressively to have knocked $40k off the balance in 2 years. The reason your potential new monthly payment would be a couple hundred bucks lower is because the balance is much lower now, not because of the new rate. If you're paying down the mortgage aggressively, that lessens the need to refinance to a lower rate. Although, if the chance came along to lower it by a half point or more, then you might want to jump on that.

If you are paying down the mortgage aggressively, why care about a lower monthly payment? If you are paying down aggressively and can afford that easily, look at 15 year mortgages. Those probably lower the rate enough to make it worthwhile and have you paying off the mortgage much sooner with much less interest paid overall.

Topic Author
raamakoti
Posts: 138
Joined: Mon Jul 31, 2017 10:20 am

Re: Home Refinance

Post by raamakoti » Wed Jul 10, 2019 9:36 am

Admiral wrote:
Wed Jul 10, 2019 7:17 am
raamakoti wrote:
Wed Jul 10, 2019 6:06 am
My current mortgage rate is 3.875% flat for 30 years. 2 years into the orignal mortgage of 340k - now 300k left.
my monthly payment is $1598 with escrow close to $700 more.

I saw this offer - through online lender.
Rate APR Mo. payment Fee
3.625% 3.643% $1,372 $675

$226 in monthly payment reduction.
Is it worth refinancing? Seems like a good deal with initial numbers, but wanted to check with friends here.

PS: yes we are maxing out on our 401ks, Roth IRAs and HSA Savings.
First, just because you see a rate online doesn't mean that's the rate you'll get. You need to have a high credit score to get this teaser rates. That said, you also need to see what ALL the fees are (closing costs, title search, etc). A rate spread that small may not be worth it, and keep in mind you'll be re-amortizing back to a 30 year loan. So, your payment will be smaller, but you will have added two more years of high-interest payments, because loans are front loaded with interest. Use an online amortization calculator to compare the loans.

Side note: How did you manage to pay 40k in principal off in TWO years on a 340k loan? That indicates $1666 of principal paid down per month, on average. That is not possible based on the info you provided.
I paid additional $27k then whatever was reduced as part of mortgage payment - below is the summary of extra I paid, I wanted to pay aggressively to bring the Principal down to 50% of original loan. After that there is no added advantage to pay off sooner. Original loan without extra payment was charging me $235,570.19 interest, by plan is to pay less than $75,000 in interest if possible. We don't have any other debt, no car payments, we drive paid off 100k+ mile cars, no credit card debt, both working professionals with decent income. Any year we can't take time off for vacation because of business or other reasons, we pay off mortgage. Bonuses and salary hike goes towards mortgage as well. The plan is to get off high interest loading front end asap. Back end of the loan does not offer any incentive to pay it faster.

Payment Date Payment Amount Interest Paid Principal Paid Additional Principal Payment
1 10-01-17 1,598.81 1,097.92 500.89 2,965.97
2 11-01-17 1,598.81 1,086.72 512.08
3 12-01-17 1,598.81 1,085.07 513.74 500
4 01-01-18 1,598.81 1,081.79 517.01
5 02-01-18 1,598.81 1,080.12 518.68
6 03-01-18 1,598.81 1,078.45 520.36
7 04-01-18 1,598.81 1,076.77 522.04 1,035
8 05-01-18 1,598.81 1,071.74 527.06 880
9 06-01-18 1,598.81 1,067.20 531.61 500
10 07-01-18 1,598.81 1,063.87 534.94 600
11 08-01-18 1,598.81 1,060.20 538.6 600
12 09-01-18 1,598.81 1,056.53 542.28 3,250
13 10-01-18 1,598.81 1,044.28 554.53 5,400
14 11-01-18 1,598.81 1,025.05 573.75 1,000
15 12-01-18 1,598.81 1,019.97 578.84
16 01-01-19 1,598.81 1,018.10 580.71
17 02-01-19 1,598.81 1,016.22 582.58
18 03-01-19 1,598.81 1,014.34 584.46
19 04-01-19 1,598.81 1,012.46 586.35
20 05-01-19 1,598.81 1,010.56 588.24
21 06-01-19 1,598.81 1,008.66 590.14
22 07-01-19 1,598.81 1,006.76 592.05 11,000

Admiral
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Re: Home Refinance

Post by Admiral » Wed Jul 10, 2019 9:40 am

raamakoti wrote:
Wed Jul 10, 2019 9:36 am
Admiral wrote:
Wed Jul 10, 2019 7:17 am
raamakoti wrote:
Wed Jul 10, 2019 6:06 am
My current mortgage rate is 3.875% flat for 30 years. 2 years into the orignal mortgage of 340k - now 300k left.
my monthly payment is $1598 with escrow close to $700 more.

I saw this offer - through online lender.
Rate APR Mo. payment Fee
3.625% 3.643% $1,372 $675

$226 in monthly payment reduction.
Is it worth refinancing? Seems like a good deal with initial numbers, but wanted to check with friends here.

PS: yes we are maxing out on our 401ks, Roth IRAs and HSA Savings.
First, just because you see a rate online doesn't mean that's the rate you'll get. You need to have a high credit score to get this teaser rates. That said, you also need to see what ALL the fees are (closing costs, title search, etc). A rate spread that small may not be worth it, and keep in mind you'll be re-amortizing back to a 30 year loan. So, your payment will be smaller, but you will have added two more years of high-interest payments, because loans are front loaded with interest. Use an online amortization calculator to compare the loans.

Side note: How did you manage to pay 40k in principal off in TWO years on a 340k loan? That indicates $1666 of principal paid down per month, on average. That is not possible based on the info you provided.
I paid additional $27k then whatever was reduced as part of mortgage payment - below is the summary of extra I paid, I wanted to pay aggressively to bring the Principal down to 50% of original loan. After that there is no added advantage to pay off sooner. Original loan without extra payment was charging me $235,570.19 interest, by plan is to pay less than $75,000 in interest if possible. We don't have any other debt, no car payments, we drive paid off 100k+ mile cars, no credit card debt, both working professionals with decent income. Any year we can't take time off for vacation because of business or other reasons, we pay off mortgage. Bonuses and salary hike goes towards mortgage as well. The plan is to get off high interest loading front end asap. Back end of the loan does not offer any incentive to pay it faster.

Payment Date Payment Amount Interest Paid Principal Paid Additional Principal Payment
1 10-01-17 1,598.81 1,097.92 500.89 2,965.97
2 11-01-17 1,598.81 1,086.72 512.08
3 12-01-17 1,598.81 1,085.07 513.74 500
4 01-01-18 1,598.81 1,081.79 517.01
5 02-01-18 1,598.81 1,080.12 518.68
6 03-01-18 1,598.81 1,078.45 520.36
7 04-01-18 1,598.81 1,076.77 522.04 1,035
8 05-01-18 1,598.81 1,071.74 527.06 880
9 06-01-18 1,598.81 1,067.20 531.61 500
10 07-01-18 1,598.81 1,063.87 534.94 600
11 08-01-18 1,598.81 1,060.20 538.6 600
12 09-01-18 1,598.81 1,056.53 542.28 3,250
13 10-01-18 1,598.81 1,044.28 554.53 5,400
14 11-01-18 1,598.81 1,025.05 573.75 1,000
15 12-01-18 1,598.81 1,019.97 578.84
16 01-01-19 1,598.81 1,018.10 580.71
17 02-01-19 1,598.81 1,016.22 582.58
18 03-01-19 1,598.81 1,014.34 584.46
19 04-01-19 1,598.81 1,012.46 586.35
20 05-01-19 1,598.81 1,010.56 588.24
21 06-01-19 1,598.81 1,008.66 590.14
22 07-01-19 1,598.81 1,006.76 592.05 11,000
You should have included this information in your OP.

As chevca said, if you are prepaying your current loan (which is probably unwise financially, but that's just MHO) then you should refinance to a 15 year loan, assuming favorable rate spread, and stop prepayments.

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8foot7
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Re: Home Refinance

Post by 8foot7 » Wed Jul 10, 2019 9:42 am

I would not bother going from 3.875 to 3.625 if you are prepaying so much.

Quirkz
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Re: Home Refinance

Post by Quirkz » Wed Jul 10, 2019 9:44 am

Agree with the others. The rate difference is too small to be worth it. Most of the savings is just because you'd be resetting the mortgage with a significantly smaller amount. I'd just keep plugging away for now. If there's a reason you really need to lower the monthly payment for cashflow purposes, a recast might be more appropriate, but since you've been aggressively paying extra that doesn't seem to be the case.

The better way to shave off interest would be to compress it to a 15, but that'd probably raise your payment, and may not fit your model of "hurry through the front, coast on the back side".

chevca
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Re: Home Refinance

Post by chevca » Wed Jul 10, 2019 9:56 am

OP, the incentive on prepayment is the same at the start of the mortgage as it is near the end. You never pay 3.875% on that prepayment again. There is no "front loading" of interest on a mortgage. An often misunderstood concept.

The interest portion of your payment is always based off the balance and your mortgage rate, and the term of it. If you lower the balance, you pay less interest. If you shorten the term. You pay less interest.

From the sounds of your wants in a mortgage and what interest amount you want to pay, you should really be looking at a 15 year mortgage. You're overcomplicating this.

Admiral
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Re: Home Refinance

Post by Admiral » Wed Jul 10, 2019 10:02 am

Quirkz wrote:
Wed Jul 10, 2019 9:44 am

The better way to shave off interest would be to compress it to a 15, but that'd probably raise your payment, and may not fit your model of "hurry through the front, coast on the back side".
OP has already effectively raised the payment by prepaying. If the rate was good on the 15, OP would likely be paying less than what's being paid right now--albeit without the ability to stop making the larger payment without a refi to a longer term.

Inflation eats away at the value of prepayment. Why anyone would pre-pay a loan below 4% is beyond me. I would encourage you to read this piece: https://www.fool.com/mortgages/2018/05/ ... nvest.aspx

Here's an excerpt.
Inflation reduces the savings from prepaying your mortgage: If you have a fixed rate mortgage, your mortgage payments stay the same for the life of the loan. If your monthly payment is $1,500 today, it'll be $1,500 in 25 years. But $1,500 in 25 years is worth the equivalent of just $942 in today's dollars, assuming a 2% inflation rate. Your mortgage effectively costs less over time, and future savings from prepaying interest must be discounted based on inflation. If you take a 30-year $300,000 mortgage today and pay off your loan 8 1/2 years early, the $80,000 you'll save in interest comes more than 21 years in the future, so you effectively save less than $49,000.
How will your net worth be affected by prepaying your mortgage?
While being debt-free is a laudable goal, it's important to look at the big financial picture. You're better off having a small amount of debt and a lot of money than having no debt but no savings either. So, before you decide to prepay your mortgage, think about how this will impact your net worth.

Let's say you have a $300,000, 30-year fixed rate mortgage at a 4.5% interest rate, like the example above. If you pay $1,820 per month instead of $1,520, you pay almost $80,000 less in interest and pay off your loan in 21 years and six months. But, during that time, you've paid an extra $3,600 in mortgage payments each year.

What if you instead invested $3,600 annually for 21 years, putting the money into an IRA or 401(k) and earning 7% on your investments? You'd have $161,514. This is more than double what you'd save in mortgage interest -- so you'd end up with a higher total net worth even though you're still in debt.

After 21 years of payments, you'd owe $134,783 on your $300,000 mortgage if you never made an extra payment. If you decided you really wanted to be debt free, you could take your $161,514, pay off the $134,783 mortgage balance, and have $26,731 left over.

And this doesn't even factor in tax breaks for investing or paying mortgage interest. Making $3,600 investments in a 401(k) or IRA would give you a $792 tax break in the 22% tax bracket. Assuming you got the same break each year, that's $16,632 over 21 years. And, since you'd pay almost $80,000 less in interest, you'd lose around $17,600 in tax savings by not paying that interest if you deducted the full amount and were taxed at 22% each year you claimed the deduction.

What about the fact a mortgage provides a guaranteed return on investment?
One of the best arguments for paying extra on your mortgage is the guaranteed return on investment. However, the return is low compared to what you make by investing. You could invest fairly conservatively and still end up earning a higher rate of return than current mortgage rates -- especially when factoring in tax breaks.
Of course, paying down a mortgage does not have the same risk equivalent as investing in equities...Grabiner will probably find this thread and show the mortgage rate vs taxable bonds. But if you can't beat a 3.x% mortgage by investing in the market over decades...then why invest?

megabad
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Re: Home Refinance

Post by megabad » Wed Jul 10, 2019 10:31 am

I basically agree with the above. I think the savings from switching rates would be several thousand in interest (let's say $6k) on a 15 year payoff schedule (your current pace roughly). To get that rate, you would spend maybe $2k when all said and done. So you would save $4k over 15 years. A couple hundred bucks a year doesn't see like a whole lot to me for someone that saves something like $70k per year. If you insist on paying down mortgage early, I would get a sub 3% 15 year loan instead as suggested. Then your savings would be closer to $20k over 15 years, a little better. Over 30 years, I think you would probably come out ahead if you invested in taxable instead if that fits your investment philosophy as suggested above. I guess in that case I would take the refinance deal (and stop prepaying).

alaskantraveler
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Re: Home Refinance

Post by alaskantraveler » Wed Jul 10, 2019 10:41 am

The change in the interest rate from 3.875% to 3.625% is a savings of $750 in interest per year on $300k. That isnt much savings, and often the cost of refinancing can be hard to flesh out. Make sure you are aware of all of the fees and costs. As others have said, it is probably not worth it.

barnaclebob
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Re: Home Refinance

Post by barnaclebob » Wed Jul 10, 2019 11:36 am

Admiral wrote:
Wed Jul 10, 2019 7:17 am
...keep in mind you'll be re-amortizing back to a 30 year loan. So, your payment will be smaller, but you will have added two more years of high-interest payments, because loans are front loaded with interest.
If OP's principle is the same he wont be paying more in interest at the start of the loan with a reduced interest rate. He might be paying more over the life of the loan due to the re extended term.

The term "front loaded" is frequently misused to make people think that they are paying "more" interest at the start of a loan. Yes you are paying more at the start but it has nothing to do with whatever "front loading" means, its only due to owing more money.

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dm200
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Re: Home Refinance

Post by dm200 » Wed Jul 10, 2019 11:40 am

barnaclebob wrote:
Wed Jul 10, 2019 11:36 am
Admiral wrote:
Wed Jul 10, 2019 7:17 am
...keep in mind you'll be re-amortizing back to a 30 year loan. So, your payment will be smaller, but you will have added two more years of high-interest payments, because loans are front loaded with interest.
The term "front loaded" is frequently misused to make people think that they are paying "more" interest at the start of a loan. Yes you are paying more at the start but it has nothing to do with whatever "front loading" means, its only due to owing more money.
Yes - I agree.

However, there is another aspect to almost all mortgages where there is, or may be "front loading". When you pay fees in getting the loan, when calculating the disclosed APR, those fees are calculated as though you will keep the loan for the full maturity (e.g 30 years). if the loan is paid off earlier, you are effectively paying a much higher APR.

barnaclebob
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Re: Home Refinance

Post by barnaclebob » Wed Jul 10, 2019 11:42 am

dm200 wrote:
Wed Jul 10, 2019 11:40 am
barnaclebob wrote:
Wed Jul 10, 2019 11:36 am
Admiral wrote:
Wed Jul 10, 2019 7:17 am
...keep in mind you'll be re-amortizing back to a 30 year loan. So, your payment will be smaller, but you will have added two more years of high-interest payments, because loans are front loaded with interest.
The term "front loaded" is frequently misused to make people think that they are paying "more" interest at the start of a loan. Yes you are paying more at the start but it has nothing to do with whatever "front loading" means, its only due to owing more money.
Yes - I agree.

However, there is another aspect to almost all mortgages where there is, or may be "front loading". When you pay fees in getting the loan, when calculating the disclosed APR, those fees are calculated as though you will keep the loan for the full maturity (e.g 30 years). if the loan is paid off earlier, you are effectively paying a much higher APR.
But those fees are a sunk cost and shouldn't really affect anything that happens after they are paid. If interest rates keep going down it can make sense to refi every year paying 3k in closing costs.

Admiral
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Re: Home Refinance

Post by Admiral » Wed Jul 10, 2019 11:42 am

barnaclebob wrote:
Wed Jul 10, 2019 11:36 am
Admiral wrote:
Wed Jul 10, 2019 7:17 am
...keep in mind you'll be re-amortizing back to a 30 year loan. So, your payment will be smaller, but you will have added two more years of high-interest payments, because loans are front loaded with interest.
If OP's principle is the same he wont be paying more in interest at the start of the loan with a reduced interest rate. He might be paying more over the life of the loan due to the re extended term.

The term "front loaded" is frequently misused to make people think that they are paying "more" interest at the start of a loan. Yes you are paying more at the start but it has nothing to do with whatever "front loading" means, its only due to owing more money.
I understand that, I used "front loaded" in the sense that the ratio of interest:principal is much larger at the start of the loan than the end, because the balance is much larger.

He would be paying more interest in each payment because he's going from a 28 year loan (2 years in) to a 30 year loan. The re-amortization causes the interest to be larger.

delamer
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Re: Home Refinance

Post by delamer » Wed Jul 10, 2019 11:55 am

Have not read all the other replies, but have you considered recasting instead of refinancing?

That will lower your payment too: https://www.lendingtree.com/home/mortga ... recasting/

ShowMeTheER
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Re: Home Refinance

Post by ShowMeTheER » Wed Jul 10, 2019 1:19 pm

Depending on your total 'junk' fees, I would do it.

A quarter point is a quarter point. Give your healthy mortgage balance, you can certainly find a winning refi right now. The version you quoted might be a winner, but you have to get to the true total fees in order to analyze it. If the real answer was $750 here, then of course do it.

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dm200
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Re: Home Refinance

Post by dm200 » Wed Jul 10, 2019 1:37 pm

Admiral wrote:
Wed Jul 10, 2019 11:42 am
barnaclebob wrote:
Wed Jul 10, 2019 11:36 am
Admiral wrote:
Wed Jul 10, 2019 7:17 am
...keep in mind you'll be re-amortizing back to a 30 year loan. So, your payment will be smaller, but you will have added two more years of high-interest payments, because loans are front loaded with interest.
If OP's principle is the same he wont be paying more in interest at the start of the loan with a reduced interest rate. He might be paying more over the life of the loan due to the re extended term.
The term "front loaded" is frequently misused to make people think that they are paying "more" interest at the start of a loan. Yes you are paying more at the start but it has nothing to do with whatever "front loading" means, its only due to owing more money.
I understand that, I used "front loaded" in the sense that the ratio of interest:principal is much larger at the start of the loan than the end, because the balance is much larger.
He would be paying more interest in each payment because he's going from a 28 year loan (2 years in) to a 30 year loan. The re-amortization causes the interest to be larger.
While, for consumer loans, previously allowed sever front loading (such as "rule of 78s") are no longer allowed, but just about every consumer loan pays more interest each month at the beginning - because of the higher balance.

Topic Author
raamakoti
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Re: Home Refinance

Post by raamakoti » Wed Jul 10, 2019 2:15 pm

Thank you all for your help, Really appreciate it
What I mean by front end interest loading is based on the monthly fixed mortgage payment and its split between interest and principal. In my case the monthly payment is 1599. In the initial years of the mortgage out of that 1599 around 67% goes towards interest and only 33% goes towards principal.
Once the mortgage balance reaches around 50% then the balance is switched, 67% towards principal and balance towards interest. Technically I agree that I am still paying 3.875% of the outstanding balance in interest, and this switch happened because of reduction in outstanding loan balance.

Because of the initial spread of high payment towards interest, by the time the principal reaches 50% I would have paid 80% of the total interest. Which is independent of length of mortgage. I tested this 80% rule with various mortgage lengths.
In my case 80% of $235,570 is equal to $188,456. That’s lot of money to give it to the bank. But I do understand the missed opportunity cost of using that money for investing with higher yields that’s where I could not make my mind yet and hence the struggle.

chevca
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Re: Home Refinance

Post by chevca » Wed Jul 10, 2019 7:48 pm

I just ran a 300k mortgage at 3.25% and 15 years. It showed just a hair under 80k in total interest paid just sticking to the 180 month schedule. Does that not give you just about exactly what you want?

If you want to refi and plan to pay down aggressively still, why not just get a 15 year mortgage?

Bacchus01
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Re: Home Refinance

Post by Bacchus01 » Wed Jul 10, 2019 9:25 pm

Don’t pay any attention to the monthly payment.

Look at the interest payment. If theni terest payment reduction pays back the refi costs in under two years, refinance. That’s my rule.

Admiral
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Re: Home Refinance

Post by Admiral » Thu Jul 11, 2019 6:06 am

raamakoti wrote:
Wed Jul 10, 2019 2:15 pm
Thank you all for your help, Really appreciate it
What I mean by front end interest loading is based on the monthly fixed mortgage payment and its split between interest and principal. In my case the monthly payment is 1599. In the initial years of the mortgage out of that 1599 around 67% goes towards interest and only 33% goes towards principal.
Once the mortgage balance reaches around 50% then the balance is switched, 67% towards principal and balance towards interest. Technically I agree that I am still paying 3.875% of the outstanding balance in interest, and this switch happened because of reduction in outstanding loan balance.

Because of the initial spread of high payment towards interest, by the time the principal reaches 50% I would have paid 80% of the total interest. Which is independent of length of mortgage. I tested this 80% rule with various mortgage lengths.
In my case 80% of $235,570 is equal to $188,456. That’s lot of money to give it to the bank. But I do understand the missed opportunity cost of using that money for investing with higher yields that’s where I could not make my mind yet and hence the struggle.
I would, again, point you to the article I linked to. Don't get hung up on the lifetime interest: that's a straw man. It may be "$188,456" over 30 years, but the purchasing power of those future dollars is severely eroded. Do we all want to pay less interest? Sure we do. But not at the expense of a lower net worth and less liquidity. The answer is a shorter term. If you can easily afford to pre-pay, then a 15 year loan makes sense. If it seems a burden, you can always refinance later to a longer term, which will lower the payment. The shorter loan also means you knock off the principal balance faster, so if you even DID need to refi to a 30 year, the payment would be lower.

Let's also point out the the "total interest" of $188k is a straw man in another sense: Almost NOBODY keeps the the same 30 year loan with the same interest rate for 30 years.

Quirkz
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Re: Home Refinance

Post by Quirkz » Thu Jul 11, 2019 9:27 am

Admiral wrote:
Thu Jul 11, 2019 6:06 am
I would, again, point you to the article I linked to. Don't get hung up on the lifetime interest: that's a straw man. It may be "$188,456" over 30 years, but the purchasing power of those future dollars is severely eroded. Do we all want to pay less interest? Sure we do. But not at the expense of a lower net worth and less liquidity.
But you're paying more than half that interest in the first 10 years, with the largest amounts right up front. It's great that I can discount my 2029 payment a little and my final 2049 payment a lot, but the day after signing I'm on the hook for today's dollars, and that's where most of the interest is disappearing. That makes it pretty immediate to me.
Admiral wrote:
Thu Jul 11, 2019 6:06 am
Let's also point out the the "total interest" of $188k is a straw man in another sense: Almost NOBODY keeps the the same 30 year loan with the same interest rate for 30 years.
Sure. Most of them buy a bigger house, with another 30-year loan, resetting the payment schedule. They'll probably end up paying $350k in interest over 45 years. I agree that $188k on the first house isn't remotely accurate, but unfortunately in the wrong way.

Sure, here at Bogleheads there are a lot of high earners and motivated debt reducers who may not let the loan stick around that long, but that's pretty exceptional.

Admiral
Posts: 2109
Joined: Mon Oct 27, 2014 12:35 pm

Re: Home Refinance

Post by Admiral » Thu Jul 11, 2019 9:46 am

Quirkz wrote:
Thu Jul 11, 2019 9:27 am
Admiral wrote:
Thu Jul 11, 2019 6:06 am
I would, again, point you to the article I linked to. Don't get hung up on the lifetime interest: that's a straw man. It may be "$188,456" over 30 years, but the purchasing power of those future dollars is severely eroded. Do we all want to pay less interest? Sure we do. But not at the expense of a lower net worth and less liquidity.
But you're paying more than half that interest in the first 10 years, with the largest amounts right up front. It's great that I can discount my 2029 payment a little and my final 2049 payment a lot, but the day after signing I'm on the hook for today's dollars, and that's where most of the interest is disappearing. That makes it pretty immediate to me.
Admiral wrote:
Thu Jul 11, 2019 6:06 am
Let's also point out the the "total interest" of $188k is a straw man in another sense: Almost NOBODY keeps the the same 30 year loan with the same interest rate for 30 years.
Sure. Most of them buy a bigger house, with another 30-year loan, resetting the payment schedule. They'll probably end up paying $350k in interest over 45 years. I agree that $188k on the first house isn't remotely accurate, but unfortunately in the wrong way.

Sure, here at Bogleheads there are a lot of high earners and motivated debt reducers who may not let the loan stick around that long, but that's pretty exceptional.
And exceptional should be our yardstick here.

People who churn houses (which is what you describe) are on the treadmill of life: the payment never goes away. The most financially prudent option, IMO, is to buy small starter home one can easily afford (presumably before kids), sell that (hopefully at a profit), and then buy a larger home that is affordable, pay it off in 15 years, and then go into retirement with no housing debt. Most people don't do this. It's called lifestyle creep.

Virtually everyone on this board has been a home buyer during a period of INSANELY low interest rates. Over 20 years my rates have gone from 30 year 8.25% to my current 15 Year, 2.25%.

With rates at 2-3.5%, I don't even give the interest a second thought! Who cares! It's barely above inflation (ie free money) and the cost over time is immaterial to me. Heck you can practically match today's rates with Total Bond or even dividends from the S&P. I'm happy to pay that for a loan of $300,000 and throw everything I can into tax-advantaged accounts.

Complaining about 3.5% interest on a home loan (interest which may even be tax deductible) strikes me as...ridiculous. If you don't like the interest, save up for 20 years and pay cash.

4th and Inches
Posts: 185
Joined: Mon Nov 12, 2012 8:53 pm

Re: Home Refinance

Post by 4th and Inches » Thu Jul 11, 2019 12:11 pm

I have a 30-year mortgage sitting at $381k at 3.875% and have been looking at refinancing for about a month now. I simply can't find a 30 year rate worth jumping on that doesn't have a ton of out-of-pocket closing costs to get the rate lower.

For me I need to see a 30-year in the 3.5% range or lower with an absolute max of about $1500 total to close to even consider it. I'm going to keep waiting.

Bacchus01
Posts: 2888
Joined: Mon Dec 24, 2012 9:35 pm

Re: Home Refinance

Post by Bacchus01 » Thu Jul 11, 2019 12:20 pm

4th and Inches wrote:
Thu Jul 11, 2019 12:11 pm
I have a 30-year mortgage sitting at $381k at 3.875% and have been looking at refinancing for about a month now. I simply can't find a 30 year rate worth jumping on that doesn't have a ton of out-of-pocket closing costs to get the rate lower.

For me I need to see a 30-year in the 3.5% range or lower with an absolute max of about $1500 total to close to even consider it. I'm going to keep waiting.
A drop from 3.5% to 3.875% saves you about $1400/yr in interest, paying back a $1,500 closing cost in about 13 months. My rule is always to refi if the interest savings can payback in under 24 months.

The spread between a 30 and 15 year rate right now really is attractive as well. You could be looking at a 15 year closer to 3.25% or lower. That pays back a $1,500 closing cost in about 9 months. Sweet deal if you can swing the payments.

I think rates are going lower as they just ticked up a hair. But that's gambling at this point.

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