At what point does refinancing make sense

Discussion in 'Finance, Investments, and Careers' started by Dback Jon, Nov 5, 2019.

  1. Dback Jon

    Dback Jon Killer Snail Contributor

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    Currently in a 15-year fixed at 3.875% - refinanced in 2017. Offers now for 3.00%
     
  2. BigRedRage

    BigRedRage Reckless Contributor

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    It can always make sense with a better rate as with the better rate your interest cost goes down and your mortgage payment goes down but if you continue the same mortgage payment, you are saving money all over the place. a .875 drop is pretty significant if you still have a high balance on your mortgage.
     
  3. elindholm

    elindholm edited for content

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    It depends a lot on the fees. A lot of lenders will offer very low rates but then make the money back with fees. So the money you save over the long term on interest is paid up front instead.

    To make an apples-to-apples comparison, try to get your bottom-line closing costs as close as possible to zero. There will be closing costs, of course, but the lender can fold those into the loan amount. For example, if you are trying to refinance $200,000, and the costs are $4000, they'll have you borrow $204,000 so that your immediate bottom line looks like zero.

    I look at both the new monthly payment and the new total payment (i.e. monthly times number of payments). Inflation is an unknown, interest is deductible under some circumstances (not so many anymore), and there's an argument to be made for how you could invest money that you aren't spending on a day-to-day basis, so things get messy and uncertain pretty quickly. But if both the monthly payment and the total payment will be less, and your immediate costs are zero, then it's probably worth it.

    There are online mortgage calculators that will let you play with the numbers and get a sense of how all of these things interact. The one I've used is https://www.mortgagecalculator.org/, but they're probably all about the same. Be sure to zero out the tax and insurance payments in the calculator so that you're looking only at the mortgage itself, if that's what you're interested in.

    The rule of thumb used to be that it was all worth doing if you could bring your interest rate down by a full percent. But rates are lower now, and you have a shorter term (not the usual 30 years), so your compounded interest will be less. My guess is that a decrease of 7/8 is right on the fence as to whether it's worth it. If the lender starts giving you a run-around about disclosing fees, or if there's something else about the process that is going to be a pain in the ass, that can push things to the "don't bother" direction.

    To illustrate, the total payments on a 15-year at 3.875% are $134,000 per $100,000, whereas at 3.0% they're $126,000. So you're saving only $8000 per $100,000 over the entire 15-year period, even with what looks like a big drop in rate. Of course if you owe $400,000 then it's a different story.
     
  4. Dback Jon

    Dback Jon Killer Snail Contributor

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    Thanks - I owe $169K currently

    House is valued (based on recent home sales in the hood (all houses are similar in sq ft) at $325K (only because the bathrooms are old, remodel those, and I would be around 350K).

    Another wrinkle - looking to remodel the bathrooms, so was also exploring a Equity LOC, which would have a higher rate (but wouldn't start for awhile).

    So refinancing at a higher amount might make sense as well.
     
  5. BigRedRage

    BigRedRage Reckless Contributor

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    Ive found some pretty awesome bathroom remodels for under $5,000. Could be worth looking into it first to say if you could save and pay cash vs paying interest on the remodel.
     
  6. elindholm

    elindholm edited for content

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    So that means your loan was for $185-190k and your payment is $1350-1400, right?

    You have plenty of equity, so if you don't mind tacking on a couple of years, and you find an agreeable lender, you could refinance $190-195k at 3.00% for the same payment or a little less (just more of them at the end). Then that leaves you with ~$20k for your remodeling, and you're paying only 3% on it.
     
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  7. Dback Jon

    Dback Jon Killer Snail Contributor

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    Where?

    It will be a complete gut with replacing 60 year old plumbing
     
  8. Dback Jon

    Dback Jon Killer Snail Contributor

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    195 was original amount, payment without Insurance and Taxes is about 1420
     
  9. BigRedRage

    BigRedRage Reckless Contributor

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    just different accounts from friends who redid their bathrooms. It might not have been a full gut like that though. Just removing the shower/flooring and replacing with travertine or etc along with faucet cabinets and etc.
     

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