Home Refinance

Ok, so my local bank is offering a 3% 15 year refinance and I have been crunching numbers for 2 weeks...

here is how it breaks down...

Currently, I am approx. 3 years into a 30 year mortgage at 4.75%.

My payoff is approx 191-192k, home value is right around that amount maybe slightly higher (it really dropped since I bought in 2007 but I am still about even keel)

With Principal/Interest/Escrows/PMI my payment is currently $1430.

If I want to refinance with 0 out of pocket I can do the following.

Borrow $20,000 at 9.9% for 5 years (to pay 5k closing and reduce principal to an acceptable amount)
Borrow $177,000 at 3% for 15 years

Totals break down as follows:

Principal/Interest $1222/mo
Tax Escrows $380/mo
PMI $100/mo
Personal Loan Payment $424/mo

Total: $2126/month

So raising my monthly installment by $700 which is tough to swallow but the benefits in the long run ...

After 5 years the $424 personal loan and the $100 PMI would drop off the payment AND I would only have 10 years remaining on the approx. $1600 per month.

The disadvantage is adding the $5k closing costs on to my total and if I decide to move in the next 5 years that'd be a loss. This is a possibility as I have been looking to move as I have previously stated.

This may all sound like jibberish as its just a cliff notes version of whats going around my head, but the idea of dropping THAT many years off my mortgage is appealing.

What does everyone think? Obviously the answer would be "if you can afford it go ahead" but are the drawbacks worth it? I mean I could really just send the additional $700 a month to my current mortgage and pay it down faster.

First of all, NEVER pay a PMI...light the money on fire, it's more entertaining.

Ask your current lender for a loan modification...this will save you thousands in closing costs. Explain to them you are shopping for the 15 year product, and have seen published 3% rates. They will know you are serious and instead of risking losing your business, they will usually agree to modify your current loan (term/rate). If not, you have the ability to tell them to go get fucked, and should.

The banking industry is extremely deceptive and prefers an uninformed consumer. Loans can be negotiated like all other transactions. They want to get money out the door (loans) more than they want it coming in (deposits).

Also, at the time of signing, tell them you want a free float down on the rate . That means if it goes down in a defined period of time, they will give you the lower rate.

3% at 15 years is VERY good, and I would strongly advise you to do it. By shortening your term 15 years, you'll probably save upwards of $200+k.

Jason, I called my current company and they dont offer any "steamline" loans as they call them... PMI is unfortunately necessary as I am not at an 80% LTV anymore due to the housing market plummeting...

You are right with how much it will save over time though... its huge just gotta suck it up for 5 years and pay 700 more than I am now!

If that's the case, call the county and have your taxes reassessed. If your prop took that big of a hit, you'll likely save enough in property taxes to put down towards principle and get your PMI removed.

My piece of advise....
Do a 30 year and pay 700 more on the principal. I advise this as you don't know what the future hold and if need to you can pay your regular note and use the 700 for emergencies. I got a 2.71 rate for a 30 year instead of a 15 I saved .25%. But I pay the 15 year pay payment. My note is a lot more 3k but we are a 2 income household so I am still saving and both me and the wife max out the 401k. Of course you don't have kids you do not have to pay child care...30k a year for two...but it will go down to 10k next year when my youngest starts kindergarten...now that is a raise

Paying addtl principle is always a good idea. Generally the 15 year terms are about a half point lower than 30s. If you are concerned about circumstances changing with income then it's not a bad alternative.

Im not too concerned with income changes, it's been pretty consistent for 10 years...

but, it's definitely a bigger chunk out of the check...

if it were an extra 2-300 thats a no brainer but 700 is getting into Infiniti payment range lol

With the 200,000+k you'll save you can buy a Ferrari

I reworked my budget and I can still max out my yearly IRA and save a good amount by doing this, I will just have to be more careful with things like throwing $500 on a sporting event lol

I just went through this on our house, and were in a similar spot. Ultimately we ended up doing the refi, and rolling the $5k closing costs into the new loan. I was doing the ROI as you did, and told my mortgage guy the same as you that I would have to be in the house for years to get that money back, what if I move etc. He did point out that a portion of those closing costs are actually you pre-paying the first year of taxes and insurance (or at least it was in my case), so the ROI was much shorter.

The big red flag in the above is the $20k at a raping 9.9%. In those 5 years you are going to cough up $5,437 in interest to get that $20k loan. So in addition to adding new closing costs, you are going to get hit for another $5k+ here.

Here's some mortgage math for food for though - and this is in regard to the more flexible option of paying additional principal on your current loan instead of the refi...and I'm just using the actual mortgage payment, ignoring the additional on top stuff as they are constant. So this comparison is just on the basic mortgage payment itself (roughly $1,053) to show reduced years of payment and interest coughed up per option.

You are 3yrs in with a payoff amount of $192k. By my math that would put the original loan at about $202k since 3 years of payments would leave a balance around $192. If you were to live out that loan full term - $202k, 30yr, 4.75% - you would have paid a total of $379k over the life of the loan - meaning over $177k in interest alone (makes you want to puke right?)

If you were to NOT refi, but dropped an additional $700 on the principal each month instead, my handy mortgage payment model spreadsheet shows that you would pay $270k total, with only $68k in interest (still hurts, but is significantly better). And you would be paid off in 155 payments (so you'd be already 3 years into that)...which is less than 13 years! And that's not including the 36 months you already paid. Take those out and you are talking roughly 10 years more of payments at the higher rate...not 15.

Plus this gives you more flexibility. For example, if $700 was a bit much to add to the monthly payment, perhaps adding $500 would work better for you. In that case you would pay the loan off in 15.3 years total (minus your 3 years in already, so only 12.3 from right now), and have paid a total of $284k, with $82k in interest.

Now you say to me...but I'd only be paying $46k in interest if I do the 15yr 3% option now. Yes, but bear in mind that in 3 years you have already paid over $28k in interest on your original loan, so you cannot just look forward and do the math. You would be paying $74, between the two loans, saving you less than $10k, which you would quickly blow with the closing costs and the interest on that 10% loan, and we didn't even add in the PMI.

The 1.75% reduction in the interest rate sounds great, but is not going to provide anywhere close to the savings to make it a better option, especially in the face of the 9.9% loan on $20, plus closing cost, plus getting into PMI again. The only people who love that are the bank and the PMI people. They try to get you in with the interest reduction, but in the end you are not making out...they are.

That said, I do not pay more into my mortgage to pay down the principal because I do not plan on being in this house for more than 3-5 more years. So there is no benefit to my doing so - I am never going to pay this loan off, in 10, 15 or 30 years, I'll be gone long before then. So you should consider how long you plan to be there when you look at this...it is important. The only thing it would do is result in more profit when I sell the house, since I will have basically been using the loan as a savings account - but that assumes no drop in property value - and considering the time value of money...I want that money now so that I can invest it, not when I sell the place. I would lose money by paying into a mortgage I wasn't planning to pay off at some point.

FBD can keep me honest here on the math, but while 15yr at 3% is in fact great if you were taking a new loan, given where you are on your current one, you are considerably better off paying down your principal on this loan instead (even at less than $700/month). And the tax reassessment is an excellent suggestion also if you have lost a good chunk of value.

wow thats a wealth of info and thanks for taking the time BC...

I ran a similar pay-down calculator and it was spot on with your numbers...

I guess it is just discipline in adding that payment each month

We just did our first child care visit yesterday for our first who will be born in November. I could literally buy a second house for the same cost as child care...I almost passed out. For 5 years of child care I could have a 6 series BMW convertible, or perhaps a porsche 911 carrera...insane. I cannot fathom how the hell we are going to afford a second one.

ZombiePatton wrote:

My piece of advise....
Do a 30 year and pay 700 more on the principal. I advise this as you don't know what the future hold and if need to you can pay your regular note and use the 700 for emergencies. I got a 2.71 rate for a 30 year instead of a 15 I saved .25%. But I pay the 15 year pay payment. My note is a lot more 3k but we are a 2 income household so I am still saving and both me and the wife max out the 401k. Of course you don't have kids you do not have to pay child care...30k a year for two...but it will go down to 10k next year when my youngest starts kindergarten...now that is a raise

No problem at all. It may have been a bit much but I got on a roll...sometimes the MBA guy in me comes out swinging. Plus we just did this like 4 months ago, so I had much of it close in mind. You are right though, putting that extra in certainly takes fortitude...but the thought of potentially having zero mortgage payment in 10 years should keep you going! For me it would be the massive reduction in interest. Giving 6 figures less to the profit of the bank is what would drive me personally.

Good luck.

kjcolby1978 wrote:

wow thats a wealth of info and thanks for taking the time BC...

I ran a similar pay-down calculator and it was spot on with your numbers...

I guess it is just discipline in adding that payment each month

There are 2 schools of thought regarding mortgage financing...those who look at it as "good debt" for long-term tax implications (mortgage interest write offs, etc., and those who look at ANY debt as bad debt (me).

I'm generally uncomfortable with ANY debt, so I want to pay it down as quickly as possible. When I retire at 50, I will be mortgage free on my residence and most of my investment properties. I am forsaking cash now, but knowing that I'll literally be saving millions with this strategy gives me peace. Sure, I could be living really large right now, but I don't want to be making any payments when I'm retired.

So ask yourself if you are ok with this "good" debt, in which case the 30 year fixed is a good play. If you are like me, then make small sacrifices now for long term peace of mind.

There are people that get rich (on paper) with various investments, but if you know any truly "wealthy" people, they are heavy on real estate...not glamorous beach houses, but income producing residential and light commercial (dry cleaners, barber shops, etc). Almost all of them pay down principle in short terms (15 years or less), because equity in real estate is as valuable as cash in hand when doing asset analysis because in addition to real cash value, real estate affords additional tax benefits that straight income from dividends does not. You can't imagine the annual tax refunds possible when factors like rehabs, debt service, operating expenses, materials and supplies, etc are all factored in. These expenses roll into your reported taxable income and bring your AGI (adjusted gross income) down a bracket or 2. If you've been witholding based on your projected primary income then lower your AGI a percent, you can buy a new car with the refund...seriously. Fully legal of course.

In short, decide your position and go confidently in that direction...both roads leads to positive outcomes.

Very well said...

bcbaldeagle76 wrote:

We just did our first child care visit yesterday for our first who will be born in November. I could literally buy a second house for the same cost as child care...I almost passed out. For 5 years of child care I could have a 6 series BMW convertible, or perhaps a porsche 911 carrera...insane. I cannot fathom how the hell we are going to afford a second one.

ZombiePatton wrote:

My piece of advise....
Do a 30 year and pay 700 more on the principal. I advise this as you don't know what the future hold and if need to you can pay your regular note and use the 700 for emergencies. I got a 2.71 rate for a 30 year instead of a 15 I saved .25%. But I pay the 15 year pay payment. My note is a lot more 3k but we are a 2 income household so I am still saving and both me and the wife max out the 401k. Of course you don't have kids you do not have to pay child care...30k a year for two...but it will go down to 10k next year when my youngest starts kindergarten...now that is a raise

My wife had a very good job as a pharma rep...and when our third was born I made her resign. Money for childcare was out of control...We had a private nanny and adding another baby would have basically earmarked my wife's salary (after taxes) to the nanny, minivan payment and groceries. Pathetic. Now she's home with them all day, I have meals waiting for me at night, and she is a lot less frazzled and bitchy at the end of the day. AND she is now an employee in my real estate company, so I'm her boss! haha...

Strong work! Yeah, the second child (eventually) will still not quite justify her staying home, but same as you, if we have a third, that will be the end of her going to work...it would be pointless from a cost perspective.

I'll have to work on becoming her boss...I have time to work that one out!

holy shit thats a hefty payment

i dont know your situation but ill tell you this much - if you need dual incomes to make that fly DONT DO IT

we got pretty comfy with two incomes then suddenly we BOTH lost our jobs here in MI it was fucking tough but we managed - had to soak some savings to live on until i got back to work

but can you imagine trying to front 2000+ / mo if you're struck by ANY other type of financial burden?

thanks for all the info... this is on a single income I am not married nor do I have kids

FBD hit it on the head with his first response. Banks love a refinance. Cause its just more chance for them to take your shit from you. And I would certainly recommend lowering the years of payments you have left. I made the mistake of extending mine and now as it stands I owe 76k yet, and since the market plummeted here, my property is now assessed at 63. So in other words, I've spent 30k+ and now need to spend 70+ more to be able to sell for a total deficit of 40+k... Banks suck... If you can get it payed off faster, then go for it.

I think (and it may have been alluded to) you also need to decide what your window is at this current location. If you see yourself moving in the next few years, then really what's the point of paying it down or go to a 15 year (as opposed to a 30)? If, however, you are comfortable staying there for the next 10-15 years, then it starts to make more sense paying it down or refinancing.

And that's a great point bcbaldeagle makes that I hadn't even considered. I'll have to remember that when we are come up to that decision point again.

FBD wrote:

With the 200,000+k you'll save you can buy a Ferrari

YUMMY

Have you looked into streamlining your loan? Maybe reducing the interest rate will save money.

Danoma08 wrote:

Have you looked into streamlining your loan? Maybe reducing the interest rate will save money.

Dan, I contacted my mortgage co regarding streamlining and they said I cant because the payment would not be reduced enough to meet FHA guidelines...

I dont know much about this process and the information online is very vague on it, would another mortgage co be able to streamline even if mine cant?

kjcolby1978 wrote:

Danoma08 wrote:

Have you looked into streamlining your loan? Maybe reducing the interest rate will save money.

Dan, I contacted my mortgage co regarding streamlining and they said I cant because the payment would not be reduced enough to meet FHA guidelines...

I dont know much about this process and the information online is very vague on it, would another mortgage co be able to streamline even if mine cant?

Kyle, just remember, they will not be totally forthcoming with options for you. They don't want to lower your rate or shorten your term. You need to tell them you're going to go elsewhere unless they can accommodate your needs. It's a bluff game with these guys. If you approach them with knowledge of their industry, they'll know they can't bullshit you.

Here's how it should go:

U: "I'm interested in seeing what you recommend on a new loan product."

Bank (b): What do you have in mind?

U: well I currently have a 30 year note with your bank, and with all of the recent rate reductions, I think now is a good time to look at a 15 year.

B: Um, well, (they bring up your account and see the fortune they are making) you have a pretty competitive package, and when you factor in closing costs, it will probably be a wash to refinance.

U: That's funny because I just spoke with the VP of lending at your competitor and he showed me several scenarios that would make it very attractive to refi and shorten my term by 15 years. Instead of just going with them right away, I wanted to give you a chance at keeping my business.

B: (after soiling himself) Let me see what I can do. Well, we could do a 15 year at 3%, but you'd still have all the closing costs, etc...

U: The other bank offered to finance my closing costs too...

Do you see what I'm getting at? They are trained at retention and making it as difficult as possible to keep business on the books! Work them over like a car dealer...that's all they are and they are extremely paranoid about their competition. God luck and have fun!