Should I refinance?

About 18 months ago, we did a cash out refinance to deal with an emergency financial situation (I know, I know: that was pre-YNAB! Now we have an emergency cushion and sinking funds!). Thankfully, we did manage a lower interest rate at that time, so it was not a total disaster. It was calculated that the costs would be recouped within 4 years (or 2.5 years from now).  I'm wondering if it would be insane or wise to refinance again. The details: We currently owe about $150,000 on a house worth about $215,000. We have a little less than 16 years left on this mortgage, which is at 3.375% interest. If we decided to stay in this house until it is paid off, at what point would a refinance make sense? I see some banks advertising rates in the range of 2.5% APR for 15 year fixed. I've tried the refinance calculators but I am still befuddled about how to factor in not yet having recouped the cost of our last refi... and it's also a bit tricky to know exactly what the exact cost with any particular lender would be. So I don't know if this is just splitting hairs at this point, or if the math is on our side.

Full disclosure: we have other things to mull over, too, like whether we can really commit to staying in the house that long term, but it would help to have the financial part straighter in my mind. I knew I could turn to the wisdom of the YNAB board--so thanks in advance to anyone willing to weigh in on this!

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  • The last refi is a sunk cost. Staying in a higher rate mortgage than what is currently available for longer doesn't make sense. Look for a refinance opportunity where you get a lender credit to cover most/all of the closing costs. Break-even should be calculated in a matter of months not years.

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      • Annieland
      • I was told there would be no math.
      • Annieland
      • 1 mth ago
      • Reported - view

      nolesrule Oh man, now you're making me think about refinancing again and I did in Sept 2019 (for the first time ever).  I got a 15 yr for 3.125% and paid some points.  I see now I could get 2.625% with lender credits and a much lower payment (I know the pmt isn't the point).  

      I don't think I have time for the whole rigamarole right now, but what happens if you want to finance for fewer years? That always confused me.  I had 20 yrs left when I refinanced to 15 years.  But if I have 13ish years left now, do I have to do some maneuvers not to basically refinance the last year I already paid?  I think once I attempted to do a cash out in order to re-apply to the balance to set it to the time frame I wanted, but that fizzled because it was a bad agent who didn't lock when I thought he did and then rates went up and I abandoned the whole project.

      Paying points seemed to make some sense to me last time because I know I'm not leaving my house unless I win the megamillions or something, and probably not even then!

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  • Annieland said:
    But if I have 13ish years left now, do I have to do some maneuvers not to basically refinance the last year I already paid?

     No. You refinance the current balance. You pay extra to principal to keep paying the same amount as you do now, or at least enough to change the 15 year end point to 13 years. Making the same payment as you have now would shorten a new 15 year loan to less than the time remaining on the current loan because it's the same payment but less interest paid with each payment, so more going to principal.

    For example if you have a $200k mortgage balance the interest on the next payment at 3.125% is $520.83 on a payment of about $1550. The lower rate on a new loan would have a payment of $1435.37 and first month interest would be $437.50. So interest is lower and payment is lower.

    If you make the same $1550 payment at the new interest rate you'll be done in 12.5-ish years and save $8900 in interest. So you would not want to pay points to get that rate as it would cut into the savings significantly.

    In this scenario a $1498.60 payment would be enough extra to end at the same point as the current mortgage.
     

    Annieland said:
    Paying points seemed to make some sense to me last time because I know I'm not leaving my house unless I win the megamillions or something, and probably not even then!

     It may or may  not make sense. Paying points gets you a lower rate by paying interest up front. So you are really paying a higher rate than the interest rate (that's why they also show an APR which is higher as a way to compare costs). The points are a sunk cost. No matter how long you hold onto the current mortgage you can never make up that cost staying at your current rate when compared to what you will pay by refinancing to a lower rate with no costs.

    Like 1
      • Annieland
      • I was told there would be no math.
      • Annieland
      • 1 mth ago
      • 1
      • Reported - view

      nolesrule Ok, got it. Thank you (for the edits with example as well:)).  I just ran some numbers in bankrate and with my situation I'd save about $9-12k overall I think, depending on how much I pay towards principal each month.  It's close to a 20% savings on the overall interest on my current loan, and if I had a coupon for 20% off at Saks I'd probably use it (I don't shop at Saks).  So it would probably be worth it, as long as I don't overlook some other fee.  I'll keep an eye on rates for a bit and hopefully they'll be low when I have some time to work on this.  Thanks again as always :).

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