Help me with my refinance scenario

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Topic Author
Triple digit golfer
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Joined: Mon May 18, 2009 5:57 pm

Help me with my refinance scenario

Post by Triple digit golfer »

Here are the facts:

Current mortgage
$315k remaining on 30 year fixed at 3.5%
25.5 years remaining, $1,556 monthly PI
85% LTV, but no PMI because I accepted the 3.5% rate instead of 3.375% with PMI.

Potential refinance
2.875% 30 year fixed
Would require roughly $20k to be paid down in order to get to 80% LTV.
$4,460 closing costs which would be rolled into the new loan
New loan would be $299.5k. PI would be $1,243. I would be putting the additional $313 per month savings to the mortgage. It would be paid off in 21.5 years vs. 25.5 with the original loan.

I absolutely do not want to sell any equities, so I would take the $20k from my bond portfolio to put down. In a sense, then, am I not really losing anything in terms of time value of money because I'm putting $20k into a 3.5% loan vs. holding the $20k in a 2.2% yielding bond fund? Maybe even coming out ahead?

However, I will be directing new money to whichever asset class is lagging as my IPS calls for, so over time I will ultimately end up replenishing the bonds anyway. Even if I take the $20k in bonds now, my portfolio will be right on the desired stock/bond ratio because the portfolio is large enough (high six figures) that $20k doesn't make a large difference either way percentage wise. My AA is 80/20 and right now we're at 78/22. Pulling the $20k will make us 80/20.

How do I determine whether to:

A. Put the $20k down, do the refinance, pay the additional monthly savings to principal

B. Do nothing, keep the $20k invested and keep the current mortgage as is

C. Something else?
deltaneutral83
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Re: Help me with my refinance scenario

Post by deltaneutral83 »

On the math, I come up with a break even somewhere in between 2-3 years on 62 basis points, so if you're in the house for 3 years, should be ok. On the conceptual side, I'd think you will get a lot of different responses with regards to owning bonds while having a mortgage as they essentially cancel each other out.
Topic Author
Triple digit golfer
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Re: Help me with my refinance scenario

Post by Triple digit golfer »

deltaneutral83 wrote: Wed Mar 04, 2020 3:31 pm On the math, I come up with a break even somewhere in between 2-3 years on 62 basis points, so if you're in the house for 3 years, should be ok. On the conceptual side, I'd think you will get a lot of different responses with regards to owning bonds while having a mortgage as they essentially cancel each other out. Paying 12.5bps for PMI on the first one is not something I may fully understand, I assume the bank was just taking the extra 12.5 bps and getting PMI on you anyway and maybe some additional spread?
Thanks for your response. We plan to live in the house at least 16 years (our daughter will be out of high school). But obviously you never know. If we were to move, it would be from an outside factor that we didn't anticipate.

I own bonds not for the return, but in order to have a couple years of expenses in case of a job loss or other catastrophe, as well as dampen some of the losses in an equity downturn. We currently have around 2.5 years in bonds, so taking $20k out will still leave us with 2+ years of expense. That's why it doesn't overly concern me.

But yes, I conceptually believe that strictly from a financial, P&L type standpoint, paying down a 3.5% mortgage is more advantageous than owning shares of Total Bond Market at current interest rates.

Yes, we would have had to pay PMI, but instead took a 12.5 basis point increase in the rate. The bank more than likely has PMI on the loan anyway and covered their cost with the 12.5 basis points.

The reason we didn't put more down is because we didn't have the fairly large taxable account we have now and we hadn't sold our prior house yet. I wanted some liquidity to help us sleep at night in case the prior house didn't sell quickly. It sold in a day.
Topic Author
Triple digit golfer
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Re: Help me with my refinance scenario

Post by Triple digit golfer »

One bump for the evening crowd.
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Nate79
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Re: Help me with my refinance scenario

Post by Nate79 »

Why are you paying mortgage costs? Have you shopped around using the various recommended sites like Mortgage professor?
I always try to do no cost refi and no points.
Topic Author
Triple digit golfer
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Re: Help me with my refinance scenario

Post by Triple digit golfer »

Nate79 wrote: Wed Mar 04, 2020 9:32 pm Why are you paying mortgage costs? Have you shopped around using the various recommended sites like Mortgage professor?
I always try to do no cost refi and no points.
I'm just starting to look. Our credit is frozen. Do I have to unfreeze it in order to get any quotes, typically? The couple of companies I've talked to have required it. I'd prefer to get some conditional quotes and then have them do the soft inquiries. Our credit scores are both 800+.

I would like to shop for no points, no cost and then anything less than 3.5% is a go. But shouldn't I also compare to lower rates with points or closing costs?

Any thoughts on whether it would be advisable to pay down my current mortgage to 80% loan to value?
Golf maniac
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Re: Help me with my refinance scenario

Post by Golf maniac »

It seems like a no brainer for you to refi and put the $20k in to reduce the LTV below 80%. One question, why roll the closing costs into the loan? Why not pull a little more out of the bond fund and pay them up front. Especially if the bonds are yielding 2.2%.
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Triple digit golfer
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Re: Help me with my refinance scenario

Post by Triple digit golfer »

Golf maniac wrote: Wed Mar 04, 2020 9:48 pm It seems like a no brainer for you to refi and put the $20k in to reduce the LTV below 80%. One question, why roll the closing costs into the loan? Why not pull a little more out of the bond fund and pay them up front. Especially if the bonds are yielding 2.2%.
Sure, I could do that. But where do I stop? Theoretically it makes more sense to put as much down from bonds as I could. But then I don't really have an 80/20 portfolio anymore.

I think the most I'd be comfortable putting down is the amount that would get my bond allocation down to 2 years expense, which would be around $35k, give or take.
dandinsac
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Re: Help me with my refinance scenario

Post by dandinsac »

It may make sense to pay down the existing mortgage by the $20K right away. You can save a little bit, (3.5% / 12 * 20000 = $60), as you figure out the refinance.

Lenderfi.com has 25 year mortgages with no costs. That may be another alternative for you to consider. You do not need to unfreeze your credit to see their rates and closing costs.
Topic Author
Triple digit golfer
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Re: Help me with my refinance scenario

Post by Triple digit golfer »

dandinsac wrote: Wed Mar 04, 2020 10:00 pm It may make sense to pay down the existing mortgage by the $20K right away. You can save a little bit, (3.5% / 12 * 20000 = $60), as you figure out the refinance.

Lenderfi.com has 25 year mortgages with no costs. That may be another alternative for you to consider. You do not need to unfreeze your credit to see their rates and closing costs.
Thanks, I'll check them out.

On a refinance, how does my current loan get paid off? Check from title company directly to the original lender?

What about escrow balance with old lender?

If I'm 80% LTV or less ,is it as easy as not doing escrow with the new loan and having the original lender true up my escrow account when closing out the loan?
Topic Author
Triple digit golfer
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Re: Help me with my refinance scenario

Post by Triple digit golfer »

Lenderfi has 6 options for each loan type, with varying points/credits and closing costs. Best I can tell, the bottom one in each is the one with zero closing costs.

The 30, 25, and 20 year all have 3.375% fixed rates assuming I pay down my current balance to 80% LTV.

So I'd be saving 0.125%.

$1556 current payment x 306 payments remaining = $476k total payments left.

$20,000 paydown plus $1,457 potential payment x 300 payments for 25 year = $457k total payments left.

Total lifetime savings $16k.

However, in the refinance scenario, I'm putting $20k down initially, so the savings is actually something less.

I'm surprised the rate isn't lower, actually. I will tinker with scenarios at 70% LTV or lower. I put in 800+ credit so if the rates can come down at all, it will be from a lower LTV.
dandinsac
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Re: Help me with my refinance scenario

Post by dandinsac »

Triple digit golfer wrote: Wed Mar 04, 2020 10:07 pm On a refinance, how does my current loan get paid off? Check from title company directly to the original lender?

What about escrow balance with old lender?
The title company pays off the mortgage. Old lender returns escrow balance.
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