Refi or just pay extra?

Posting because I grew up listening to and reading experts who'd say not to refinance in my situation. To them, it's too soon and not enough of a rate decrease to offset the closing costs. Does that still apply? It doesn't seem to.

We moved about 3 yrs ago. The current mortgage is 3.75% with 17.25 yrs left until paid off (was a 20 yr loan). I got a quote today for 2.75% on a 15 yr mortgage. The monthly payment would move up only slightly, but the overall savings on interest paid would be about $22,000 over the loan's life. Refinancing cost the same closing costs as a new loan, around 2,500 with the lender, which is the same lender the mortgage is with now. There was also the offer to buy half a point and get to 2.25% interest. Roughly that would cost 700 more upfront and save 3,500 more on interest over the loan. (On a side note, my coworker is also refinancing yet with the closing costs waived from another lender, but at a higher interest rate (like 3.6%), so the banks get their money one way or another.) Another co worker said, why go to all that hassle, just make extra payments to the loan and pay it off quicker, which would also mean less interest paid. It seems like I'd have to pay it off in half the time to get the same interest savings. I'm not in a spot to double my mortgage payment. 

Any thoughts from the community? Too early or strike while the rates are good?

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  • I look at it as the additional cost is like a deposit on a 15 yr CD which can't be withdrawn until maturity. The return is the interest saved. (A penny saved...)

    Annualize that and see it's worth the "investment".

    Like 1
      • dakinemaui
      • dakinemaui
      • 6 mths ago
      • 4
      • Reported - view

      For example, "invest" $2500, get $22k back (compared to what you would have otherwise) after 15 years. This is an annual rate of return of 14.6%. Seems pretty good if you can handle the ramifications of 1) slightly higher monthly payments and 2) "tie" up the initial investment ($2500) that long.

      There's always the chance you'll sell before 15 years, so looking at breakeven is useful. That occurs shortly after the first year, which is very reasonable. In other words, low risk of "losing" money.

      Looking at the second scenario: "invest" $3200, get $25.5k back, which is a 13.9% annualized rate. So not quite as good of an investment, although you get more money out because you put more in. The monthly payment is also slightly less, but I'm not considering a return on that for simplicity.

      You can also compare the 2.75% and 2.25% options: Assume you had the 2.75%, but were evaluating whether to pay $700 to get a 2.25%. Breakeven for that also happens in the first year. FWIW, I think there's about $6.8k interest saved by dropping this half-point, rather than $3.5k. (I'm guessing you're at about $160 principal in order to cut interest by 22k between the original and 2.75/15 yr loans.)

      If it were me, I think I'd run with the 2.25%, assuming you can live without $3200 for the next 15 years.

      Like 4
  • Biggest question is how long you expect to stay.  If through the life of the loan, refinance looks like a good move.  

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      • dakinemaui
      • dakinemaui
      • 6 mths ago
      • 2
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      Herman By my calculations, OP could sell a little after a year (after refinance) and still be ahead. Those closing costs get recouped pretty quickly with the additional equity.

      Like 2
      • Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 6 mths ago
      • Reported - view

      Herman I'd say the answer is for a while. Part of the reason for the recent job change was to stay in the area and retire from that job. I'm not expecting any reasons to move. However, I can't control the future, so something may force us to sell.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 6 mths ago
      • 1
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      Khaki Storm If you had asked me when I did a refinance in late 2016 if I'd be moving 600 miles away in summer 2019, I would have told you "hell no!" And yet....   🏠🚚🏠

      Like 1
  • One of the better refinance calculators I've found is at:

    https://www.nerdwallet.com/mortgages/refinance-calculator/calculate-refinance-savings

    Crucially, it considers equity in the savings & breakeven analysis. 

    Like 3
      • Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 6 mths ago
      • Reported - view

      dakinemaui That's a good one! I was using others where I ran each mortgage separate and then compared notes. That tool has a great analysis feature! Thanks!

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    • Khaki Storm
    • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
    • Khaki_Storm.1
    • 6 mths ago
    • 1
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    dakinemaui said:
    FWIW, I think there's about $6.8k interest saved by dropping this half-point, rather than $3.5k.

     Ok, so all the other numbers I did on with a mortgage calculator and then with the loan officer. The 3.5k, I roughly estimated in my head.

    Thank you for the thoughtful perspective. That helps a lot looking at it in another way.

    Also, I didn't mention it, but all of the loans are fixed rate. I don't like the ARMs or other options. We also paid down 25% when we moved into this house.

    Like 1
  • Get a 20 year or 15 year refinance that has enough lender credits to cover all closing costs excluding any prepaid items. Don't pay any money  for a refinance. The rate may be a little higher than your quote but it will still beat what you have now. Additionally, if rates drop more, then you can do another no cost refinance for nothing out of pocket and you won't have any un-recouped sunk costs.

    I recommend checking rates at LenderFi.com and MortgageProfessor.com which are the two sites I monitor for best rates.

    If you get a new 20 year, then continue making the same payment you are now, because part of the payment reduction is due to stretching the term back out to 20 years.

    For what it's worth, I think rates are going to drop more. There hasn't been a drop to go along with the drop in 10 year Treasury yields yet, and there's speculation that it's due to the high volume of refinance requests. Demand is keeping he price up. Personally, I'm holding out for a bit more of a drop, as rates crept back up this week compared to last week. If I was to refinance now, it would definitely be to a mortgage with no out of pocket costs so that I could do it again soon if rates drop again.

    Like 2
      • dakinemaui
      • dakinemaui
      • 6 mths ago
      • 1
      • Reported - view

      nolesrule I can understand hedging your bets if one thinks there is more to gain by waiting. It's the age-old trade off of deciding when is "good enough" to jump. 🙂 Too bad there's not the equivalent of a "trailing stop" for mortgages.

      Like 1
      • dakinemaui
      • dakinemaui
      • 6 mths ago
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      nolesrule 

      Assuming OP has $2500 to play with, the above analysis shows an annual rate of return of 14.6% after 15 years for the 2.75% loan. On the other hand, leveraging lender money (zero upfront) would get 3%/15 yr, with a net savings over the current 3.75%/17.25 yr of $18.8k. They also take the "easy" route of putting that $2500 in a savings account, earning 2% ($3375 future value), in order to be ready to pounce on a rate drop. The "net" return of savings + interest saved is therefore 22.2k. This is 14.6% annualized, which is the same as the "committed" route.

      Thus, the smart fish isn't losing anything by not having skin in the game and has the potential upside of greater gains if rates drop. 

      I like it.

      Like 1
      • dakinemaui
      • dakinemaui
      • 6 mths ago
      • 1
      • Reported - view

      Repeating the above for the 2.25%/15 yr/$3200 case, the no-skin route nets 13.2% compared to 13.9% (previously shown) by committing now. If you're never going to use your own money, I think rates would have to drop by 0.75% to be a better deal. @nolesrule,  do you think that's possible -- a par rate around 2%??

      Of course, all the above assumes the full 15 yr term. Selling earlier GREATLY tips the balance toward the no-skin option. I guess I still like it for that reason alone.

      Like 1
    • Khaki Storm
    • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
    • Khaki_Storm.1
    • 6 mths ago
    • Reported - view

    Thanks all. I'm going for the low rate refi with closing costs. My coworker is going with higher rate, almost full percent higher and no closing costs. We'll get to compare notes for years to come and see who comes out ahead. 

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 6 mths ago
      • Reported - view

      Khaki Storm Are you both choosing the same term? A full percent spread for closing costs vs. no closing costs seems a bit large. I've been seeing about a 5/8 percentage spread.

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      • Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 6 mths ago
      • Reported - view

      nolesrule It's like .89% difference and he went with 20 yrs, I'm going 15 yrs.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 6 mths ago
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      Khaki Storm Okay, so that's 7/8 percent difference. That makes sense given the difference in terms and closing costs.

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  • We just looked as well. We are at 3.99% on a 30. So we have 26.5 years to go 😳. I wanted to go to a 15 and we can get it for 3.00% but rolling closing costs and escrow account into it (no addl points) takes our principal from 369k to 378k. Heck, no. But we would get 6k back from escrow in a few months (but now it's in my loan, um no). I can pay the closing fees and escrow up front as well to keep the principal the same and we will have the funds but we were going to send those funds to debt.  

    After looking at all the numbers, we decided....not now. The same offer or better is going to be there 6 months from now. And the refi means that you can't throw money at your debt for a few months as your loan gets sold three times and you deal with all the hassle. Also it freezes up some money we wanted to send to debt. So we decided to hold tight and let a better situation come along. I once heard the general rule of 2% off your interest rate is a YES to refi. Anything under that is a spreadsheet and some hemming and hawing. 

    Sounds like you are ready to go for it. 

    Like 1
  • Just locked in a 15-year at 2.625% with the same mortgage processor we did our purchase with back in August. We're waiving escrow as I refuse to allow a third party to handle paying my taxes and insurance.

    The rate reduction will save us over $214/month in interest compared to our current 3.5% 20 year mortgage that we got in August. The payment will be about $216 more per month than our base payment but only $80 more than what we've actually been paying. It's not no-cost though as this processor doesn't offer negative points, but I've decided to go against my original recommendation and  that's okay. Break even time is about 12 months, so I can live with that. It'll save us $40,000 in interest.

    Like 3
  • Wiecked said:
    I once heard the general rule of 2% off your interest rate is a YES to refi. Anything under that is a spreadsheet and some hemming and hawing. 

     0.5% reduction and a closing cost make-up time of less than 2 years. You don't even need a spreadsheet as you can use this calculator....

    https://www.hughcalc.org/loancomp.cgi

    If you plan to sell before the loan payoff, look atthe row that corresponds to how far in the future from now you expect to sell.

    If you are elongating your term compared to your remaining loan, then you should also continue to make the same payment you're making now, and you can plug that payment into the calculator instead of the amortization payment.

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      • Wiecked
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      • Orchid_Tiger.5
      • 6 mths ago
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      nolesrule bokmarking this link! Thanks for adding it! 

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 6 mths ago
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      Wiecked His site has a ton of simple, useful, easy to use  calculators.

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