Author Topic: Refinancing- How to think about and approach?  (Read 1411 times)

SteelTurkey

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Refinancing- How to think about and approach?
« on: December 01, 2020, 07:31:02 AM »
My current primary residence is $450,000 duplex in Houston, TX.  I bought in 2016 with $360,000 30 year loan at 3.625%.  I have been paying down principle and remaining principle balance is $250,000.  I plan to hold property for at least another 5 years before considering selling.

I am considering refinancing.  Trying to decide on 15, 20 or 30 year option and $250,000, $300,000 or $350,000 loan value. 

Bankrate.com does shows there are zero cost refinancing options, but after a few phone calls it appears that is not realistic.  In Texas there is cost to transfer title and handful of other fees.  Appraisal may or may not be able to be waived.  If I get cash back by pursuing a loan over my $250,000 principle balance the fees seem to increase.  Believe it will cost between $2000-3500 to refinance.

The reason to get cash back would be to pursue another investment property in the next 12 months.

Reaching out to the community to get input on how I should be think about and approach the refinance.  Higher return on capital the more leveraged I am, but bigger net return with smaller loan and shorter duration.  What path makes more sense?  Also, any tricks to getting lowest cost refinance rate and minimizing fees?

Frugal Lizard

  • Magnum Stache
  • ******
  • Posts: 3300
  • Age: 53
  • Location: Southwest Ontario
  • One foot in front of the other....
Re: Refinancing- How to think about and approach?
« Reply #1 on: December 01, 2020, 09:40:43 AM »
Our rules up in Canada are different, but popping in to say:  We just refinanced.  We ended up changing lender because of the charges to do the refinance. 
DH figured out what we wanted to do, what the costs were with our current lender. They weren't terribly flexible on the fees to refinance or the rate.  It was higher than the renewal rate.
DH shopped around to a couple of different lenders to see if they were better.
One of them really wanted us to move all our loans (mortgage, second mortgage on solar panel array and secured a line of credit as well).  The payment terms are nearly unbelievable.
The only 'trick' appeared to be was understanding what all the fees were called or how they were bundled so you could actually compare apples to apples with the different lenders. 

J Boogie

  • Handlebar Stache
  • *****
  • Posts: 1447
Re: Refinancing- How to think about and approach?
« Reply #2 on: December 01, 2020, 10:08:10 AM »
Duplex owner/occupant here. I was unable to find a rate significantly better than your current rate until I was cold called by Amerisave who offered 2.875.

Duplexes usually can't get the same SFH rates, but Amerisave apparently is the best of the bunch from what I can tell.

If you have a stable and high income, I'd pull out as much $$ as you can. These low interest rates probably aren't going anywhere, but why waste time when you can invest aggressively on (safe) margin and propel yourself into financial strength? Might as well start collecting rents that will only be going up while your monthly payments stay roughly the same. Not to say you should buy the first property you see, but if there are cash flowing deals to be had you might as well have them.

The reality of aggressive central banking is that anyone who doesn't invest will see their savings and purchasing power shrink dramatically relative to the many investors worldwide benefiting from rising asset values.


ctuser1

  • Handlebar Stache
  • *****
  • Posts: 1575
Re: Refinancing- How to think about and approach?
« Reply #3 on: December 01, 2020, 10:29:29 AM »
I obsessed over this topic for about a year.

What I found is that the best and most realistic bet is to look at credit unions. They don't advertise. But many of them offer "promo rates" from time to time.
e.g. I am in the process of refinancing with Sikorsky CU advantage morgtage for 12Y term @2.5% and $749 total closing cost.
https://www.sikorskycu.org/Borrow/Loans/Mortgages/Advantage-Mortgage

I don't know if they lend outside CT (probably no, they seem hyper-local to CT based on my interaction with them so far), but maybe worth a try to call them if you want.

Someone in this forum had previously suggested some similar product from rbfcu (https://www.rbfcu.org/home-loans-realty/mortgage-refinancing) to me. rbfcu told me they won't lend outside TX (not sure if that is a permanent thing or they are just swamped and hence don't want to deal with out-of-staters). But you are in TX, so perhaps give them a call!

-----------------------------

As to which term - 30Y vs. 15Y vs 12Y or anything else - I was primarily looking at the APY/APR. I have tried to convince myself to treat the home equity in the most mathematically optimal way (i.e. take out as much money as possible and let it ride on fixed rate non-callable leverage - the best kind of leverage that is out there). However, I figured out that I hate borrowing in my guts. So I decided not to overdo it. I'm just doing a refi to a 12Y term and will let that ride down to 0 in 12 years.

It's likely best not starting from mathematics when dealing with this question, but rather as a "what makes you sleep better at night" question. Once you have figured out what makes you more comfortable, you can always invent some rationalization. e.g. my favorite one is "principal payment is a bond-substitute and hence better for asset allocation in conjunction to my stock heavy portfolio" - never you mind that I never include my home equity in my net-worth calculation.

The opportunity cost of either using or not using this leverage (even a fantastic one like the US Government subsidized, non-callable one like a mortgage) is likely not going to make or break your portfolio in the long term - so no use fretting over it. Just do what makes you sleep better! IMO.

SteelTurkey

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: Refinancing- How to think about and approach?
« Reply #4 on: December 01, 2020, 02:32:08 PM »
J Boogie - How much of a penalty would you be willing to absorb to get the cash back?  My understanding is the interest rate will be least .125% higher and fees will be $500-1000 more if I want cash back on the refinance.  Leveraging does seem like a good thing right now considering interest rates.  Guess the question is how much lower will rates go.  I think rate will be 2.75% for 30 year with cash back option.  2.35-2.55% for refinance on remaining principle only.

ctuser1- Thanks for the resources.  I will check them out.  Plus appreciate your comments on doing what makes me sleep better.  I will certainly run the numbers for all options, but need to consider gut instinct on debt load preference. 

ctuser1

  • Handlebar Stache
  • *****
  • Posts: 1575
Re: Refinancing- How to think about and approach?
« Reply #5 on: December 01, 2020, 05:33:48 PM »
J Boogie - How much of a penalty would you be willing to absorb to get the cash back?  My understanding is the interest rate will be least .125% higher and fees will be $500-1000 more if I want cash back on the refinance.

I wanted to address this part even though this is not directed at me.

If you look at small credit unions, many of them typically don't charge extra for such stuff! The advantage mortgage from Sikorsky CU that I linked above has the same closing cost ($749) and rate (2.5% for 12Y and 2.38% for 8Y) whether you take cash out, or no!

Technically, I am actually taking cash out for my refi because I am going to pay off my higher interest solar loan. But, there is nothing in the paperwork that says I have to do it. I can just take that money and put it in SP500 for all they care.

I love working with small CU's over and above large banks for this and many other reasons. You call customer service and reach someone who lives 2 miles down the street, no BS fees, etc. etc. If you look around, you'll probably find some near you.


MudPuppy

  • Pencil Stache
  • ****
  • Posts: 802
Re: Refinancing- How to think about and approach?
« Reply #6 on: December 01, 2020, 06:07:11 PM »
I actually locked in a refinance today! We bought in 2017 at 3.87 and were able to get 2.62. In our case loan term didnít make a bit of difference in our rates. We went through the same mortgage broker we bought with 3 years ago. I made the call at 1030 this morning, was able
to complete the application and provide the documents on my lunch break (did you know that you can scan papers, etc into PDF form with the iPhone notes app now? The future is here!) and was locked and sent to title processing by 6pm. I had been putting it off for months because I was afraid of the hassle and now I canít believe I stood in my own way for so long. Do it!

J Boogie

  • Handlebar Stache
  • *****
  • Posts: 1447
Re: Refinancing- How to think about and approach?
« Reply #7 on: December 01, 2020, 11:03:34 PM »
Hmm.. if a no-cost cash out credit union doesn't offer a compelling interest rate, you can also do a HELOC.

joe189man

  • Stubble
  • **
  • Posts: 153
Re: Refinancing- How to think about and approach?
« Reply #8 on: December 02, 2020, 01:30:20 PM »
find the sweet spot between mortgage refinance rate and lender credits/points. Generally lower the rate, the higher the points or fees associated with that rate and the higher the rate you can get a lender credit or money paid to you. if you want to be in the house for only 5 years,  likely a higher rate with a lender credit is the way to go as the break even between initial cost savings and savings monthly are usually greater than 5 years, do your math though.

we are in the middle of a cash out refi - looking at 2.875 and a lender credit around $1700. cash out refi's generally have higher rates

the lender will want an appraisal for a cash out refi, we are using amerisave for what its worth

lutorm

  • Bristles
  • ***
  • Posts: 263
  • Location: A large island in the middle of the Pacific Ocean
Re: Refinancing- How to think about and approach?
« Reply #9 on: December 02, 2020, 03:12:18 PM »
Our mortgage is relatively "high rate" compared to what people are getting today, 4.375%. But when I look at the refinancing options it seems it would only make sense if I wanted to lower the monthly payment -- restarting a loan now when we are 8 years into the existing one and just starting to significantly bite into principal just means we'll start over not earning any equity again and it will be a net loss. So the only point would be leverage to reinvest the payment difference? Or am I not thinking about this right?

sailinlight

  • Stubble
  • **
  • Posts: 144
Re: Refinancing- How to think about and approach?
« Reply #10 on: December 02, 2020, 03:23:50 PM »
Our mortgage is relatively "high rate" compared to what people are getting today, 4.375%. But when I look at the refinancing options it seems it would only make sense if I wanted to lower the monthly payment -- restarting a loan now when we are 8 years into the existing one and just starting to significantly bite into principal just means we'll start over not earning any equity again and it will be a net loss. So the only point would be leverage to reinvest the payment difference? Or am I not thinking about this right?
If your rate goes down, the amount of your payment that is "wasted" to interest will also go down. You should compare the amount of the monthly payment that goes toward interest today vs the amount that would go to interest after you refinance. Take that number and divide it by the refinance fees. This is the length of time it would take you break-even on the refinance.
If your goal is to pay off your mortgage faster (and while many here would argue that it's financially suboptimal), you could always pay extra each month (or put the extra in a savings account and pay it off in a lump sum when the account balance equals the remaining amount on your mortgage).

Jack0Life

  • Bristles
  • ***
  • Posts: 385
Re: Refinancing- How to think about and approach?
« Reply #11 on: December 02, 2020, 04:22:05 PM »
Our mortgage is relatively "high rate" compared to what people are getting today, 4.375%. But when I look at the refinancing options it seems it would only make sense if I wanted to lower the monthly payment -- restarting a loan now when we are 8 years into the existing one and just starting to significantly bite into principal just means we'll start over not earning any equity again and it will be a net loss. So the only point would be leverage to reinvest the payment difference? Or am I not thinking about this right?

How much is left on the current loan ??

lutorm

  • Bristles
  • ***
  • Posts: 263
  • Location: A large island in the middle of the Pacific Ocean
Re: Refinancing- How to think about and approach?
« Reply #12 on: December 02, 2020, 08:42:51 PM »
Our mortgage is relatively "high rate" compared to what people are getting today, 4.375%. But when I look at the refinancing options it seems it would only make sense if I wanted to lower the monthly payment -- restarting a loan now when we are 8 years into the existing one and just starting to significantly bite into principal just means we'll start over not earning any equity again and it will be a net loss. So the only point would be leverage to reinvest the payment difference? Or am I not thinking about this right?

How much is left on the current loan ??
22.

ctuser1

  • Handlebar Stache
  • *****
  • Posts: 1575
Re: Refinancing- How to think about and approach?
« Reply #13 on: December 03, 2020, 08:05:29 AM »
Our mortgage is relatively "high rate" compared to what people are getting today, 4.375%. But when I look at the refinancing options it seems it would only make sense if I wanted to lower the monthly payment -- restarting a loan now when we are 8 years into the existing one and just starting to significantly bite into principal just means we'll start over not earning any equity again and it will be a net loss. So the only point would be leverage to reinvest the payment difference? Or am I not thinking about this right?
If your rate goes down, the amount of your payment that is "wasted" to interest will also go down.

+1 to what @sailinlight posted.

Please double check your math. If you plot your amortization in excel (trivially simple to do a month by month calculation in excel, without using any of the more complex formulas) then you will l find that "restarting" a new loan has no impact on how much principal you pay.

Now, if you have 22 years left on a 30 year mortgage, and refi into another 30 year mortgage, then yes, your payments will go down and your principal paydown will go down too.

If you save 1.5% on the interest rate (very possible given the starting point of 4.375%) on a 20 year mortgage, you may get lower monthly payment AND faster principal paydown with a 20yr loan.
« Last Edit: December 03, 2020, 05:38:09 PM by ctuser1 »

joe189man

  • Stubble
  • **
  • Posts: 153
Re: Refinancing- How to think about and approach?
« Reply #14 on: December 03, 2020, 08:28:31 AM »
+1 to the above,

you can likely get a 20, 15, or even a 10 year mortgage for your remaining balance AND likely reduce your monthly payments saving you time and dollars

sonofsven

  • 5 O'Clock Shadow
  • *
  • Posts: 58
Re: Refinancing- How to think about and approach?
« Reply #15 on: December 04, 2020, 11:16:27 AM »
If you go 30 year you can always make extra payments if you choose.
Put your different scenarios in an amortization loan calculator (Bankrate has good calcs), then you can look at the results in five years, ten years, etc.

lutorm

  • Bristles
  • ***
  • Posts: 263
  • Location: A large island in the middle of the Pacific Ocean
Re: Refinancing- How to think about and approach?
« Reply #16 on: December 13, 2020, 10:16:58 PM »
Thanks everybody for telling me to go check, apparently we can indeed get a 15-yr mortgage at 2.25%-2.50% with basically the same monthly payments as our current one with 23 years left. So for the price of a few months worth of payments for the closing costs, we can own the house 8 years earlier.  That's literally like only paying 2/3 as much. I don't know how I could be so off base... Working on getting it done now.