New homeowner... when does REFI make sense?

[gitmo234]

Hello,

I bought my first home in April of 2010. My APR is 5%. I have no trouble making payments. I usually make a bit extra. I constantly see advertisements and stuff about lower and super low interest rates, so I looked at my bank (USAA). They are offering a 4.06% APR.

So I'm wondering, is there a general rule on when it makes sense to refinance? I am totally knew to home ownership and just figuring out a lot of stuff, and I'm guessing that for awhile (many years) it doesnt make sense because the fees and closing costs of a refi will get rid of any savings.

Thoughts on this? I dont have a need and I plan on staying in my home for a long time, but if it saves me a few hundred a month I'm open to the possibility. If it helps, according to my appraisal for my last mortgage, I'm no longer underwater.

 

[gzecc]

We just did a 30 yr fixed refi for 3.875 We have credit over 800. We will save 375 per month. Figure out the monthly saving. If you going to stay their for the forseable future it makes sense depending on the monthly/yearly savings. For us saving 4500 per year is all we needed to see.

 

[mayhem]

Shop that rate to some other banks, I bet you can knock a half a point off it.

I'd say if you can take at least 1% off it might be worth your time and closing costs, but you need to run the numbers for your specific situation. I figure the worst case scenario is you reduce your monthly commitment by 100-300 dollars, you can still make your old payment and just get out of the note that much sooner. Over 20 years, that $100 a month difference is an extra new car in your driveway.

 

[gzecc]

Go to bankrate.com to see the going rates. Money is the cheapest it has been in 75yrs. Get some before it runs out!

 

[blades]

Drop as much as you can on your principal every month, way ahead in the long run. Housing market is still bad over all and is not going to improve. Some of those offers are balloon types, or variable rates be very cautious.

 

[Bocefus78]

There are so many other factors besides rate that come into play. What type of loan do you have? FHA, VA, CONV? 80/20? etc...Do you currently pay PMI? If so, you need to get rid of that and you will be saving a boatload. If you pay pmi, finance 100K, and go from 5 to 4, your savings will be visible, but you wont break even until year 2. You wont be saving hundreds...a hundred if your lucky. Not to mention you are adding another year and a half worth of interest to your loan. As stated before, pay extra on the principal....this cant be stressed enough! Get down to 80% LTV ratio, dump PMI, and youll be happy. If all those abbreviations, dont make sense. Let me know....Ill break it down for you. HTH

 

[gitmo234]

Conventional 30 year VA loan, no PMI.

 

[begreen]

If you can afford the payments, look into refinancing into a 15 yr mortgage.

 

[gzecc]

Go for the 30, and pay it off in 15. The 15's and 30's are so close in rates, it makes no sense to lock into a 15.

 

[stee6043]

We just did a 30 yr fixed refi for 3.875 We have credit over 800. We will save 375 per month. Figure out the monthly saving. If you going to stay their for the forseable future it makes sense depending on the monthly/yearly savings. For us saving 4500 per year is all we needed to see.

For arguments sake if you're saving $4,500 per year but spent $12,000 to close....probably not a great deal. It's all relative when it comes to money saved, money spent.

Folks should always keep in mind the cost to get a new loan and the potential costs associated with getting that ultra low rates (points).

Just my two cents.

 

[begreen]

Good point. When we did our refi many years back, it was because Wells Fargo offered a no-cost conversion to us.

Edit: That should be - very low, fixed cost. It was $650.

 

[gzecc]

We just did a 30 yr fixed refi for 3.875 We have credit over 800. We will save 375 per month. Figure out the monthly saving. If you going to stay their for the forseable future it makes sense depending on the monthly/yearly savings. For us saving 4500 per year is all we needed to see.

For arguments sake if you're saving $4,500 per year but spent $12,000 to close....probably not a great deal. It's all relative when it comes to money saved, money spent.

Folks should always keep in mind the cost to get a new loan and the potential costs associated with getting that ultra low rates (points).

Just my two cents.

That true, if it cost us 12k to close it wasn't a good idea to do it. Thats only part of the equation. You need to look at the monthly, yearly saving and costs to acquire a loan. Also look at the reduced interest at the end of the term. In my case it was huge.

 

[JeffRey30747]

You need to look at the amortization schedule for your loan and the refi to do the comparison. So many factors can come into play that there isn't a hard and fast rule. I use a spreadsheet that came bundled with Excel years ago but one can be found online many different places such as
http://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx
As has already been stated, don't look at just monthly savings but focus more on keeping the payment in your budgeted range and shortening the term of the mortgage. Most institutions offer a 20 yr mortgage product too. The effect of shortening the term on the compounded interest is where the real savings will come in. Never buy anything based on a "monthly payment" approach. Look at the real cost to you over time and compare it to other alternatives.

 

[Bocefus78]

OK, no pmi...your light years ahead of most of America, congratulations! Going from a 30 to a 15 is an option. I however, would just take that extra money and put it towards principal. That way your not REQUIRED to increase your payment every month in case the poo hits the fan financially. The interest saved will be substantial. Google a mortgate amortization schedule. Plug in the amount you will be financing. You will see how at the begining of your loan, almost ALL of your monthly payment is going to interest, NOT your principal. Now plug in some additional principal into that calculator if it will let you. As the principal goes down, so will your interest paid to the bank. You wont start making a dent in principal until about year 18 if you make minimum payments. Look at it this way. If you put $100 extra a month on the principal, $1200 (annual figure) Now multiply that by 28.5 which is how many years u have left on your mortgatge. What you have here is $34,200 off your principal. Now take 5% interest of that $34,200 which is $1710 a year in interest you will not giving the bank PLUS you are knocking YEARS off of your mortgage. Now these numbers change based on your principal so without exact #'s of loan balance, etc, (which I dont want, and urge you not to post here, which Im sure you know...lol) I cant give you specific savings but I can say this, as your principal goes down, so does the amount of interest paid on said principal, AND your term. Your killing 2 birds with one stone.

OTOH, if you PAY $1200 to refi, and take another year to break even, your 2.5 years behind b/c you just put your term back to 30 years.

Basically with that same extra $1200 towards principal, in the same amount of time as it takes you to start getting ahead with a refi, you will have saved over twice that....almost three times as much. This just continues to multiply in your favor over time. The more extra principal you pay, the MORE IT WILL WORK IN YOUR FAVOR!

Bottom line is 1% is not worth doing. The refi people will tell you differently of course.

 

[JDC1]

We just did a 30 yr fixed refi for 3.875 We have credit over 800. We will save 375 per month. Figure out the monthly saving. If you going to stay their for the forseable future it makes sense depending on the monthly/yearly savings. For us saving 4500 per year is all we needed to see.

For arguments sake if you're saving $4,500 per year but spent $12,000 to close....probably not a great deal. It's all relative when it comes to money saved, money spent.

Folks should always keep in mind the cost to get a new loan and the potential costs associated with getting that ultra low rates (points).

Just my two cents.

If you save $4500/ year on a 30 yr mortgage, even if you pay it off in 15 why wouldn't you pay $12000 to refinance? We refinanced and it cost $5500 rolled into the mortgage and if we take it out the full 30 years will save over $70k in interest.

 

[woodgeek]

1. Remember your taxes go up when you reduce interest...if you are high income earner, figure you only net 70% of the interest savings.

2. Your 'net cost' can be hard to estimate (b/c sometimes your first payment is rolled in, sometimes the costs are rolled into the loan, etc.) But around here, the transation cost is ~0.5% of the principal + another 0.5% for the title. So, figure your cost as 1% of your loan amount (if you don't buy points).

Given 1 and 2, dropping your rate 1% should have simple payback of ~1.4 years.

 

[woodgeek]

I also used Zillow mortgage marketplace to get competitive rates for (2) refis...and was completely satisfied both times. The one time I just went to my bank, I got a non-competitive rate and the run-around (i.e. you current lender has no incentive to refi you).

 

[mayhem]

We just did a 30 yr fixed refi for 3.875 We have credit over 800. We will save 375 per month. Figure out the monthly saving. If you going to stay their for the forseable future it makes sense depending on the monthly/yearly savings. For us saving 4500 per year is all we needed to see.

For arguments sake if you're saving $4,500 per year but spent $12,000 to close....probably not a great deal. It's all relative when it comes to money saved, money spent.

Folks should always keep in mind the cost to get a new loan and the potential costs associated with getting that ultra low rates (points).

Just my two cents.

Not saying it doesn't happen but who in god's name ever has $12k in closing costs? I've bought one, built one and refi'd once...never had more than about $2k for closing costs and thats on a 188k note. I can't understand how it could get up that high.

 

[bluedogz]

Another variable nobody has mentioned is how long you expect to keep the house. In the above example of $4500/years cash flow savings vs. $12k closing costs (an egregious example), a 4-year holding period will have a different outcome than a 30-year holding period.

Statistically, Americans TEND to keep their houses for a 5-7 year period. The old saw of being born and buried from the same house doesn't really work anymore.

So, the big questions to ask yourself would include:
- How long do I plan to keep this house?
- What life changes do I expect in the next 5-7 years? Job change? Kids? College?
- How would any of the above change my holding period?
- At what time does any upfront cost equal the cumulative payment difference? (E.G.-if you paid $5000 to refi to a $500 lower payment/month, your breakeven would be 10 months.)
- What is your REAL cumulative payment difference? Account for rate, PMI, insurance, taxes, etc. etc.

Obviously, two next-door neighbors with identical houses and identical mortgages could reach two totally different conclusions.

"Payment difference" is an effect, not a cause, so I'd rarely recommend refinancing to "get a lower payment." The purpose of a mortgage is to buy a house, nothing else, so any changes that are not directly related to that one job are potentially extraneous and costly in the long run.




* Source: MBA in Finance, 15 years' experience in Finance, 6 years as mortgage banker.

 

[gzecc]

If I had 400k to lend out (if I only had such problems), I don't think I would be too willing to give it out at an interest rate of 3.9% for thirty years!

 

[KarlP]

Food for thought -
<ul>
[*]Right now you are paying 5% interest on everything you spend your money on instead of using it to pay down your mortgage principle.
[*]If you are planning to stay for a long time, paying down your mortgage is a sure thing investment. Bank CDs are paying ~1%.
[*]Assuming you are in the 25% tax bracket, the only way to save $0.25 on your taxes through the interest deduction is by paying a (subsidized with your tax dollars) banker $1...
[*]The standard deduction is so high these days, that if you are married you are probably only saving $0.25 on the 2nd half of $1 bills you pay the (subsidized with your tax dollars) banker.
[/list]


At a 1% difference in rate, planning to stay for a long time, having 20%+ equity, and in this economy ... refi for a new 30 year at a lower rate seems smart.
As others pointed out, watch the closing costs and keep making the same or higher payments thank you are making now. You'll knock many years off the loan.

One big exception to paying down principle with extra dollars is if inflation is higher than the rate of your mortgage, which is likely in the near future (if we aren't already there). Then I would use your money now for things you want and pay down your mortgage with worthless dollars later. Make those home improvements, buy that new stove/chainsaw/splitter/car/truck that will be more expensive in the near future instead of paying down the principle.

 

[Jack768]

Go for the 30, and pay it off in 15. The 15's and 30's are so close in rates, it makes no sense to lock into a 15.

+1.

 

[jharkin]

I could see 12k closing if its a jumbo and you bought points... but then who buys points at these rates..


Anyway I digress. The only way for sure to know if its going to be a wise move is to run the numbers. There are some good online calculators that will help.

One simple one here, calculates the breakeven point, and will tell if refinancing saves more than just putting the closing costs towards an extra payment.
http://www.dinkytown.net/java/MortgageRefinance.html


Whatever you end up doing, good luck. I have a 4.75 note... think that a refi to 3.9 could save some $$ but in 2 years we have already lost enough value that a HARP might be my only option... and then Im sill stuck with the PMI. Ive heard that only you current servicing bank can do a HARP and mine didn't seem too keen on it.