Author Topic: Would you refinance for .25%?  (Read 1403 times)

k-vette

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Would you refinance for .25%?
« on: November 28, 2014, 09:16:29 AM »
Current mortgage rate is 3.5%.  I saw an offer for 3.25%.  The catch is that its a 15 year term.  My goal has always been to payoff in 15 years.  I'm not quite meeting that in extra payments.

28 yrs left and $153k owed as of now. 

juuustin

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Re: Would you refinance for .25%?
« Reply #1 on: November 28, 2014, 09:43:28 AM »
I think this is actually two different questions.  If you were going from a 30-year 3.5% to a 30-year 3.25%, I don't think it would be worth it because of the closing costs involved.

Going from a 30-year to a 15-year is a whole different ballgame though.  I am surprised you can't get an even lower rate on a 15-year to be honest.  Bankrate.com is showing 3.07% on a 15-year.

In the end I think it all comes down to closing costs and total outlay.  If you are certain that you will eventually pay off the mortgage, then run the numbers to see what the total payments will be for the life of the mortgage. A 15-year mortgage even at the same rate will save you tens of thousands simply because of the shorter term.

neo von retorch

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Re: Would you refinance for .25%?
« Reply #2 on: November 28, 2014, 10:00:48 AM »
The general rule of thumb is 1% but we're good at math, so we don't bother with that.

28 years @ 3.5% no extra payments
$715 payment
$87,229 interest

28 years @ 3.5% making 15 year payment
$1094 payment
$43,879 interest

15 years @ 3.25%
$1075 payment
$40,515 interest

As you can see, faster payoff is what saves you the money. Roughly speaking, if you're deciding between paying $1094 each month with your current mortgage vs refinancing to the 15 year and paying slightly less, you'd save $3365 by refinancing, which is likely more than enough to make up for closing costs.

But...

Many would argue that 3.5% is still cheap money. Does any of your mortgage interest qualify for tax deductions (beyond the standard)? How about you spend the next 15 years investing the "extra" in index funds instead? Assuming an up to average 7% annual return on stock investments (after inflation), while this debt is shrinking (both through regular payments and the power of inflation)... maybe don't tie yourself down to the 15 year payment and the one-time refinance expense. Of course, that's a personal preference, a choice you have to make for yourself. I used to get excited about paying my mortgage off early, and I don't regret going from a 6.5% 30 year down to a 5.375% 15 year... down to a 3.375% 15 year. But now I'm no longer trying to pay off my mortgage as fast as possible. I'd rather make money on investments instead!