Thread: Re-financing question

I figured I would post this up for the masses to get an opinion:

My current interest rate is 5 and 7/8% on a 30 year note (bought the house 2 years ago).

I have the opportunity to re-fi at a rate of 4.375% on a 15 year note.

My monthly payments would increase by about $150 per month, and it will require closing costs/fees of $3500.

I plan to stay in the house at least 2-3 more years (probably longer). Obviously, it requies a bit of a cash outlay up front and a slightly higher monthly payment, but I would be paying alot less interest and be gaining alot more equity (not to mention my PMI drops off). Should I do it?

This is a question for Redline Robert.

If you're gonna pay off more principle in the next 2-3 years than it costs in closing fees, then I'd say yes.

If your only staying for 2-3 years then why do this? If you plan on spending 15 then I would say for sure... Correct if I am wrong please

Originally Posted by Mr Jankipotamus

If your only staying for 2-3 years then why do this? If you plan on spending 15 then I would say for sure... Correct if I am wrong please

exactly why spend more money then u have to? i can understand so u can pay it down quicker but i dont think u will make up the 3000 difference in 2-3 yrs

Well, since interest is front loaded, I am currently paying off about $100 in prinicpal everymonth (only beginning the third year of the 30 year mortgage). If I switch to the 15 year, I will be paying off about $300-$400 in principal every month.

I would recoup the $3500 closing costs in prinicpal payments after about a year.

I am more worried about the tax consequences and possibly other incidentals that I havent considered.

Originally Posted by TJ

My current interest rate is 5 and 7/8% on a 30 year note (bought the house 2 years ago).

I have the opportunity to re-fi at a rate of 4.375% on a 15 year note.

My monthly payments would increase by about $150 per month, and it will require closing costs/fees of $3500.

I plan to stay in the house at least 2-3 more years (probably longer).

For those who ask why you would do this, do the math: you re-coup the re-fi costs when you sell the house and then some. In general, for a straight swap (same terms) then if you can re-fi for a 1% drop in rates and will stay in the house 2 years or more this is usually a good deal -- just watch the refi costs. If going from a 30 to 15 year you may want to do the math a little more carefully, but you're paying of the principal at a _way_ faster rate, so again it's usually a good idea. In fact, in some cases going from a lower 30 to a higher rate 15 will still be worth it over some time, the differences in interest payments vs. principle can add up very quickly.

We've probably done a same term refi 3 or 4 times over the years with various houses. I can't recall every paying more than $3000 in refi costs, sometimes much less (like < $1000).

So, do the re-fi, but, those re-fi costs seem high, see if you can beat them down. The caveat being, that I have no idea what re-fi costs are looking like with the current market. Taxes should't be much of an issue, you'll have less to deduct per year (less interest payment) so again you can do the math, but those difference shouldn't likely matter in the big picture.

If you've had the house over 2 years when you sell it, then you'll be exempt from capital gains up to $500K (if married), so unless the principle gain pushes you over that limit. Given your payment and the fact you'll be loosing PMI that's pretty much impossible. The rules on capital gains could change in the future but that also seems unlikely.

If you only plan on staying int he houose 2 - 3 years, then it doesnt make sense. You have to consider the cost of doing the loan as well. What is your new APR? That takes into consideration costs associated with doing the loan as well.

Bottom line, if you were planning on keeping the home and paying it off, do the refi. If not, your interest saved over the next couple years doesnt justify the refinance. Your true savings would come with paying the loan off - you'll save thousands of dollars in interest payments by chopping the loan term down to 15 years.

Originally Posted by Redlinerobert

If you only plan on staying int he houose 2 - 3 years, then it doesnt make sense. You have to consider the cost of doing the loan as well. What is your new APR? That takes into consideration costs associated with doing the loan as well.

Bottom line, if you were planning on keeping the home and paying it off, do the refi. If not, your interest saved over the next couple years doesnt justify the refinance. Your true savings would come with paying the loan off - you'll save thousands of dollars in interest payments by chopping the loan term down to 15 years.

The total cost of doing the loan is the $3500 figure I quoted (actual total will be $3604.28). That includes origination fee, appraisal, underwriting, doc prep, closing agent, title insurance, recording, hazard insurance, excrow, etc... Basically, it is the total amount I will have to pay out of pocket to re-fi the house.

Also, it is my understanding that I can write off the origination fee which is about half of that total... so after that savings, I am really only comeing out of pocket about $1700 to make the re-fi happen.

Once that is paid, my monthly payment will change exactly $105 and I will go from a 30 year fixed at 5.8% to a 15 year fixed at 4.25%.

My thought was, it would take me about 18-20 months to get back my $1700 in the form of equity on the home (which I wouldnt have had on the 30 year note).

Is my thinking correct?

Does that info effect your opinion?

This helps some with the math part: Will you save by refinancing your mortgage?

Your short time horizon makes it difficult to say if a refi is a good idea.

Another option is to just keep your current loan and pay a little extra each month. The extra will automatically be credited toward your principal...

But not having to pay PMI is nice, as that is just a waste of money.