Time to refinance?

C

centralcoastobserver_IHB

New member
I've been lurking on the blog for a year or so.... great work, and great information.



Obviously, if you had the credit score and ability to re-fi out of a toxic loan, you should have done so by now. But what if your current loan is ok... how do you decide if it's worth trying for a lower interest rate? I have a 30 year fixed jumbo, with the balance now low enough to qualify for the "conforming jumbo" status. The drop in interest I've been quoted is just under a point, with monthly payments dropping by $300. The miscellaneous costs of the new loan are about $5000 despite being "no points." My current loan is only 18 months old (refinanced out of an interest only loan then) so a new 30 year fixed wouldn't extend the payments all that much. Current payments are not a problem for the household budget, but an "extra" $300 isn't bad, either. We intend to keep this house for at least 15 more years. We likely have $100,000 in equity despite the dropping market.



What should I be thinking about, to decide whether this is a good enough deal?
 
<p>The simple way to look at it is to say that $300/month will pay for the loan costs in 17 months. But of course if you stay there for 30 years, there will be 18 more months of payments, but not for another 28+ years. Statistically that is unlikely to happen--you will probably sell the place before paying it off. What's nice is that your lower interest rate will mean that you'll have a larger sum of each payment going toward the principal than your current terms, so you'll have more equity that will be returned to you if you sell the place in 15 years.</p>

<p>To get a more detailed answer you can use finance formulas which cover ways to evaluate problems like this. The $300 can be thought of as an annuity. If you have an acceptable rate of return in mind, you can find the net present value of the annuity. I think 10% is a decent average return on capital. $300/month for 15 years for example, with a cost of capital of 10%, yields a net present value of about $28,000. If you keep the loan for 30 years the savings are worth around $34k, but of course you then have to subtract the net present value of the extra 12 payments. However, they're so far into the future, they won't be worth all that much.</p>

<p>If you're going to be there for 15 years I would take the refi in a heartbeat.</p>
 
Now is a great time to refinance, probably the last time you will see interest rates this low. If you are staying a long time, it probably pays to refinance. IMO, you would be best served by continuing to pay down your mortgage with that $300 each month and pay off your loan quicker. If you amortize out an additional $300 a month as a principal payment, the loan will get paid off much quicker than you realize. You may be able to cut 10 years off the finance period depending on the loan amount.
 
<p>It used to be the rule of thumb that the rate had to go down 2 full points before you should re-fi. Then the rule seems to have drifted down to 1 %.</p>

<p>We had an 8 1/2% mortgage in late 96--that's what rates were then. We have good credit. So we could have reduced our rate at some point by 2 1/2 to 3 points in between then and now. But the costs would have been 5-7 thousand and I just couldn't stand the idea of owing that much more, even if the monthly payment went down. So we never did; instead we just paid extra, not on a regular basis, but when unespected money came in. I always tell the borrowers that even if they pay only an extra $20.00 a month, they should do that. I guess one in a hundred took my advice.</p>

<p>I think, CentralCoast, if you have 5 grand lying around, you should pay down your mtg principal 5 grand.</p>

<p>All financial advisers will tell you I am dead wrong.</p>
 
<p>Refi centralcoast. If you can get 1% less with no points, and intend to own the house long-term, a refi always makes sense. Part of that $5K could be prepaid interest component, so it might not be a cost anyway...</p>

<p>If I may ask, where are you at on the Central Coast? I have much love for the CC and particularly SLO. Not a great place for jobs, but an excellent one to live IMO.</p>
 
Thanks for the info/advice. I was thinking of the info referred to by LL, that refi only makes sense for 2 pts or more, but wasn't sure it still held in the "new market."



Ipop, we are in beautiful SLO.... great schools, great climate, but you are right about jobs. The state is the major employer, one way or another. Cal Poly, the prison, Cal Trans. We are in private sector jobs, but there aren't many well paying jobs. The Chamber of Commerce types insist "it's different here" relative to housing bubble bust, but it's really not. Smaller scale, because the population is smaller, but same stuff.
 
<p>Ah, SLO town. Man I miss cruisin' Farmers Market on Thursdays... Woodstocks, TA's (not sure if they are still around), and Linnaea's will forever be my faves. I spent a wonderful five years there. </p>

<p>My father-in-law lives in Los Osos so we get up there once or twice per year. Love to hike Montana De Oro. I could totally see retiring to that area down the line. Weather is great, people are laid back and friendly, and you can drink yourself silly at all the local vineyards... </p>
 
<p><em>refi only makes sense for 2 pts or more</em></p>

<p>It depends. Paying $5000 for a $300/month income stream for the next 15 years or more seems like a good deal to me. You break even within 2 years, given a reasonable cost of capital.</p>
 
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