Author Topic: Refinance worth it? No cost vs with closing costs  (Read 1119 times)

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Offline IrvineBasketball

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Refinance worth it? No cost vs with closing costs
« on: March 08, 2019, 01:48:52 PM »
Hi guys,

In January I took out a $440,000 30 year loan at 4.875%.

With the recent fall in interest rates, I asked my lender about refinancing. his rates are:

$440,000 at 4.375% with $2200 in closing costs. (Loan amount is approximately the same because I've only made 1 payment so far)

With the refinance, I will save $132 per month, which means I will break even on the closing costs in 17 months.

In my limited understanding, this sounds like a good idea.

Am I missing something?

I keep seeing 'no cost refinance' from others. How do those work, don't the closing costs have to be covered by someone?

Offline qwerty

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Re: Refinance worth it? No cost vs with closing costs
« Reply #1 on: March 08, 2019, 02:33:11 PM »
Makes sense to do it.

A no cost refi is more like a no upfront out of pocket costs, like you said, someone is paying those fees, and that someone is you by virtue of a higher rate.

Only reason not to do it would be if you think rates are going lower in the near future.  But that becomes too much of a guessing/gambling game

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Offline irvinehomeowner

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Re: Refinance worth it? No cost vs with closing costs
« Reply #2 on: March 08, 2019, 02:35:59 PM »
You should shop with other lenders than your current one.

It's true that no-costs usually bake it into the rate but you can easily compare the payment difference to determine which one is truly less.
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Offline marmott

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Re: Refinance worth it? No cost vs with closing costs
« Reply #3 on: March 08, 2019, 02:55:30 PM »
Are you sure you need a 30 years fixed mortgage?

We bought late November 2018 and got a 10/1 ARM below 4%. We asked the same lender for a possible refi 2 weeks ago and that's what she quoted us: 10/1 ARM at 3.625% with a closing cost of approx $1,000 or 3.75% with no closing costs.

That's a significant difference if you are not sure stay in the house really long term.

Full disclosure: we borrow more than you so that may help with the rate and the 30 years fixed / ARM decision really depends on your situation.

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Offline esquire22

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Re: Refinance worth it? No cost vs with closing costs
« Reply #4 on: March 08, 2019, 07:27:50 PM »
Definitely consult with Soylent Green Is People (sponsor to this site).  He can get you amazing rates and is super knowledgeable and professional. 

Offline USCTrojanCPA

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Re: Refinance worth it? No cost vs with closing costs
« Reply #5 on: March 08, 2019, 08:28:08 PM »
Definitely consult with Soylent Green Is People (sponsor to this site).  He can get you amazing rates and is super knowledgeable and professional. 

+1
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Offline Soylent Green Is People

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Re: Refinance worth it? No cost vs with closing costs
« Reply #6 on: March 09, 2019, 07:20:40 AM »
If it's no cost and no add to balance, it makes sense at a .25% rate improvement threshold. A "no cost" refinance is better framed as a "no fee" refinance. You will still need to pay interest prorations and possibly unpaid property taxes at the close of your refi. Those aren't "costs" per-se as you have to pay these expenses no matter if you refinance or not. Expect to bring in at the close of your refinance about 1 monthly payment of interest. If that doesn't happen, your lender is probably not giving you the best rate available.

Remember that your refinanced loan is going out for another 30 years. Yes, the new payment is low, but the additional payoff years often negate any real savings if your goal is to eliminate your mortgage. Pair your new low rate with a 25 year amortization for example. If you don't see yourself paying off the loan ever, a 7-1 or 10-1 ARM makes sense.

To the OP: 4.875 in January is pretty high. Most lenders were funding purchase loans in the mid 4's at the time. Yes, a refi is warranted today.

Most lenders will refinance if your current mortgage is 30 to 60 days old. Your original lender might not be too happy about the early payoff, but if you didn't get a good deal to start with, does it really matter?

My .02c
« Last Edit: March 09, 2019, 09:44:06 AM by Soylent Green Is People »

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Offline USCTrojanCPA

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Re: Refinance worth it? No cost vs with closing costs
« Reply #7 on: March 09, 2019, 10:26:23 AM »
I would not pay any out of pocket closing costs for a refi...you can always refi to a lower rate later if rates drop more.
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Offline irvineband

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Re: Refinance worth it? No cost vs with closing costs
« Reply #8 on: March 09, 2019, 07:15:55 PM »
If it's no cost and no add to balance, it makes sense at a .25% rate improvement threshold. A "no cost" refinance is better framed as a "no fee" refinance. You will still need to pay interest prorations and possibly unpaid property taxes at the close of your refi. Those aren't "costs" per-se as you have to pay these expenses no matter if you refinance or not. Expect to bring in at the close of your refinance about 1 monthly payment of interest. If that doesn't happen, your lender is probably not giving you the best rate available.

Remember that your refinanced loan is going out for another 30 years. Yes, the new payment is low, but the additional payoff years often negate any real savings if your goal is to eliminate your mortgage. Pair your new low rate with a 25 year amortization for example. If you don't see yourself paying off the loan ever, a 7-1 or 10-1 ARM makes sense.

To the OP: 4.875 in January is pretty high. Most lenders were funding purchase loans in the mid 4's at the time. Yes, a refi is warranted today.

Most lenders will refinance if your current mortgage is 30 to 60 days old. Your original lender might not be too happy about the early payoff, but if you didn't get a good deal to start with, does it really matter?

My .02c


Hi SGIP, I had a question about something you mentioned above:

“If you don't see yourself paying off the loan ever, a 7-1 or 10-1 ARM makes sense.”

I’m not sure I understand this exactly. But my friend kinda seems to be in alignment with this. I’m not clear on its benefit exactly? A friend of mine has two investment properties that he plans to hold on to forever. He has them both as 10/1 ARM with rates of 3.75 and 4.25 with the bank which he says is good for investment loans. He said that the bank does not recommend he do a 30 year fixed loan. He says he can just refinance to another 10/1 Arm when the time comes again. Is that the right strategies?

Offline Soylent Green Is People

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Re: Refinance worth it? No cost vs with closing costs
« Reply #9 on: March 10, 2019, 01:10:45 PM »
First rule: Never assume "oh, I can always refinance". It's a fools bargain. Income, loan limits, guidelines, and 10,000 other factors can arise that will prevent you from refinancing. Just because it was possible once before does not mean it will be possible again. Ask most folks who bought in 2005-2007 how their "Oh, I can always refinance" plans worked out. Many of the people who advocated this are today known as "renters".

Several theories - as that's all they are - on why an ARM might be a better way forward.

1) If you are only looking for an equity appreciation play for your present home ownership, why pay a higher rate for a 30 year fixed loan?

2) If you have a solid history of moving every 7 or 10 years, why pay a higher rate with a 30 year fixed loan?

3) If you see your income rising over time, and are unafraid of a rate change, why pay a higher rate with a 30 year fixed loan? Example: A $500k 30 fixed at 4% or a 10/1 ARM at 3.75 has a payment spread of about $72.00 per month, or $8,640 over 10 years. After 10 years let's say the rate on the ARM goes from 3.75 to 6.75%. That's now a payment spread of $601 between the 30 Fixed and the 10/1 ARM. Essentially, you're going to "pay back" that $8,640 savings in about 14 payments. Your break even between the two loans is roughly 11 years - and that's IF rates rise, you sell, or don't refinance. Those are pretty big "If's". You should ask yourself "Will I be earning $7300 more per year in 11 years than I'm earning today?". If the answer is "Yes", then the ARM worse case scenario would be a reasonable risk to take.

I tell everyone considering an ARM to consider this important thought: "If you are ever going to be awake at night, wandering the house wondering if you made the right choice on your ARM loan, take the fixed rate and don't look back". In the big picture, this should not be a question of payments, savings, best case or worse case scenarios. It's a question of peace of mind. Nothing more. If your personal peace of mind is met with a fixed rate, that's the right choice. If your personal peace of mind is met with an ARM, that too is the right choice.

My .02c

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« Last Edit: March 10, 2019, 01:41:36 PM by Soylent Green Is People »

Offline USCTrojanCPA

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Re: Refinance worth it? No cost vs with closing costs
« Reply #10 on: March 11, 2019, 12:11:32 PM »
The other factor with taking an ARM loan with a lower rate versus a 30-year fixed loan besides the lower monthly payment is that your loan balance gets paid down faster with a lower rate so at the end of the 7 or 10 year period you will have saved both the lower monthly payment along with a lower loan balance.
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Offline Irvinecommuter

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Re: Refinance worth it? No cost vs with closing costs
« Reply #11 on: March 11, 2019, 12:23:22 PM »
I like what SGIP said above...most of the time...it's not about the savings or payments...it's a matter of risk v reward. 

I get that you can pay off the loan a lot faster with an ARM but how much faster?  Especially when we are dealing with 4% rate.  Also...why would I want to pay off a 3.5-4% loan faster?  I can drop the money into a bond and get like 3%.

My view is that a fixed is better for 95% of the people because 95% of the population are either really good or really bad with their money...in either case, fix rate mortgages are better.

Offline qwerty

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Re: Refinance worth it? No cost vs with closing costs
« Reply #12 on: March 11, 2019, 12:40:40 PM »
I like what SGIP said above...most of the time...it's not about the savings or payments...it's a matter of risk v reward. 

I get that you can pay off the loan a lot faster with an ARM but how much faster?  Especially when we are dealing with 4% rate.  Also...why would I want to pay off a 3.5-4% loan faster?  I can drop the money into a bond and get like 3%.

My view is that a fixed is better for 95% of the people because 95% of the population are either really good or really bad with their money...in either case, fix rate mortgages are better.

This may make sense if it’s a tax free bond. If you have a lower mortgage and your interest and state taxes are below, at, or near the standard deduction of 24k then you don’t really get any tax Benefits from the mortgage. Which means you have to make an approximately 6% return before taxes. Paying interest made more sense before the new tax rules.

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Re: Refinance worth it? No cost vs with closing costs
« Reply #13 on: March 11, 2019, 12:50:27 PM »
I like what SGIP said above...most of the time...it's not about the savings or payments...it's a matter of risk v reward. 

I get that you can pay off the loan a lot faster with an ARM but how much faster?  Especially when we are dealing with 4% rate.  Also...why would I want to pay off a 3.5-4% loan faster?  I can drop the money into a bond and get like 3%.

My view is that a fixed is better for 95% of the people because 95% of the population are either really good or really bad with their money...in either case, fix rate mortgages are better.

ARM loans are not right for some buyers, but are right for other buyers.  On average people sell their homes in 5-7 years so from that perspective it makes no sense to get a higher interest rate 30-year fixed rate.  Most people don't even consider getting an ARM loan because they don't understand how it works (along with the pros and cons).  Once I fully explain to them how they work along with the pros/cons and my spreadsheet that shows them the break even points with the monthly payment sayings and lower loan balances, many of my buyers seriously consider getting an ARM loan.
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Offline Mety

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Re: Refinance worth it? No cost vs with closing costs
« Reply #14 on: March 11, 2019, 01:13:39 PM »
The ARM loan for sure especially if you are thinking of moving up in 10 years or so. Maybe your final forever home could be with the 30-yr-fixed, but I think it's just smart to pay less for homes you are going to sell in less than 10 years. Some might choose to keep it and turn into rental, but still then I don't think we will have any significant rise on the interests rates in a near future.

Also I didn't see that many people saying of using interest-only loans. Anyone used and had good or bad experience?



 

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