Best refinancing option

[danb]

I am considering doing a refinance to allow me to save for money. I bought my house for $299k in October 2011, and I currently owe $278k. We have a 30 year fixed VA loan at 3.75% with wells fargo

We have plans to move from MD to GA within the next few years to have a lower cost of living, so I'm thinking that I should switch from my 30 yr fixed to a 5/1 to take advantage of the low rates here in MD. 

USAA Provided the following quote it it looked amazing, until i talked to wells fargo:

USAA QUOTE



When I shared this info with wells fargo to get a quote from them, they said:

If you plan to stay in the home less than 5 years it might be good idea to refinance to a 5/1 ARM.

Since you plan to stay in the home less than 5 years my personal advice would be to do a low cost or free refinance (since you will not be in the home long enough the recoup the costs associated paying extra fees to get a lower rate).

The quote from USAA assumes $4,800 in lender fees, and almost $2,500 in title and 3rd party fees ($7,300 total)…. While VA lets you “roll those costs into the new mortgage” that means when you go to sell your home the pay of balance of the mortgage would be higher as a result of rolling in $7,300 in refinance fees.

If for example we did a refinance to a 5/1 ARM at 3.25% Wells Fargo would give you a credit to cover the VA funding fee, title fees and all other fees associated with refinancing (a free refinance)… This would lower your monthly payment by approximately $166 per month and there would not be anything tacked onto your loan balance like with USAA. The payment would only be $18 higher per month ($216 per year) with our option compared to the USAA option outlined below but you would save that $7,300 in fees.

Does it make more sense to stick with WF, even though the rate is 3.25% instead of 2.6%? Does it matter if we stay in MD 1 year vs 4 years?

[JLee]

Wow, that's a lot of fees. It's about twice what my house cost was ($140k), but IIRC my closing costs were ~$4k and that was including appraisal, home inspection, etc.

[caliq]

Wow, that's a lot of fees. It's about twice what my house cost was ($140k), but IIRC my closing costs were ~$4k and that was including appraisal, home inspection, etc.

VA mortgages allow 0% down with no PMI; to make up for that they require a VA funding fee on most mortgages they guarantee.

http://www.benefits.va.gov/HOMELOANS/irrrl.asp

[MDM]

I am considering doing a refinance to allow me to save for money. I bought my house for $299k in October 2011, and I currently owe $278k. We have a 30 year fixed VA loan at 3.75% with wells fargo

We have plans to move from MD to GA within the next few years to have a lower cost of living, so I'm thinking that I should switch from my 30 yr fixed to a 5/1 to take advantage of the low rates here in MD. 
...
Does it make more sense to stick with WF, even though the rate is 3.25% instead of 2.6%? Does it matter if we stay in MD 1 year vs 4 years?

One way to choose is by total cost to you.  Here "cost" would be all non-principal payments, including interest, fees, etc.  Exclude principal because you will get that back when you sell.  Yes, one could look at alternative investment returns as a function of principal paid but....

If you don't have this already, get http://office.microsoft.com/en-us/templates/loan-amortization-schedule-TC001019777.aspx or similar, so you can calculate your interest costs under various scenarios.  Then add fees and compare.  If you want to get fancy, use a Net Present Value calculation but simply adding the costs for a few years should be close enough.

The short answer to "Does it matter if we stay in MD 1 year vs 4 years?" is "yes" - because if you move immediately after refinancing you lose all the refinancing costs.  If you stay longer, lower interest payments have a chance to overcome the refi costs.

[danb]

because if you move immediately after refinancing you lose all the refinancing costs

I'm a bit confused about this line.

If I go with Wells Fargo, there are no refinancing costs, but I pay 3.25%
If I go with USAA i have 7.5K in fees, but my rate is 2.6%

I looked at the: Loan Amortization Schedule
plugged in some numbers, and I'm not sure i understand what I'm looking at

Am I doing this right?

#1 USAA LOAN
Loan amount    $278,000.00
Annual interest rate   2.625%
Loan period in years   27
Number of payments per year   12
Start date of loan   1/1/2015

IF I stay 2 years, it means I would have paid 13,655.02 in interest + 7.5K in fees = ~21K
IF I stay 4 years, it means I would have paid 33,574.57 in interest + 7.5K in fees = ~41K

#2 WELLS FARGO LOAN
Loan amount    $278,000.00
Annual interest rate   3.25 %
Loan period in years   27
Number of payments per year   12
Start date of loan   1/1/2015

IF I stay 2 years, it means I would have paid 16,942.04 in interest + 0K in fees = ~17K
IF I stay 4 years, it means I would have paid 41,800.50 in interest + 0K in fees = ~42K

So it's better to do Wells Fargo as long as I don't stay longer than 4 years?

[MDM]

because if you move immediately after refinancing you lose all the refinancing costs

I'm a bit confused about this line.

Does "...you lose [any] refinancing costs [you might have incurred]" make more sense?

Am I doing this right?

#1 USAA LOAN
Loan amount    $278,000.00
Annual interest rate   2.625%
Loan period in years   27
Number of payments per year   12
Start date of loan   1/1/2015

IF I stay 2 years, it means I would have paid 13,655.02 in interest + 7.5K in fees = ~21K    after 24 months the interest is $14,232.72
IF I stay 4 years, it means I would have paid 33,574.57 in interest + 7.5K in fees = ~41K    after 48 months the interest is $27,682.89

#2 WELLS FARGO LOAN
Loan amount    $278,000.00
Annual interest rate   3.25 %
Loan period in years   27
Number of payments per year   12
Start date of loan   1/1/2015

IF I stay 2 years, it means I would have paid 16,942.04 in interest + 0K in fees = ~17K    after 24 months the interest is $17,660.49   
IF I stay 4 years, it means I would have paid 41,800.50 in interest + 0K in fees = ~42K    after 48 months the interest is $34,429.15

So it's better to do Wells Fargo as long as I don't stay longer than 4 years?

I think you read the "4 year" amounts closer to 59 months.  See items in bold that I get from this spreadsheet.  A picture is below.  Your conclusion is valid: if you are moving "soon", don't go with USAA.

[danb]

Thanks,

I can see clearly now that going with USAA is not the best option unless i plan to stick around longer than 55+ months.

I am 100% confident i won't stay here 55+ months, with that being said, is there any reason to not go with the 3.25% free refinance?

It would still be a smart decision even if I only stayed here 1 month, right?

^compared to staying with my 3.75% current loan with WF.

--Dan

[frugaliknowit]

5/1 ARM?  Seems risky.  What if you don't move and rates move up?  Maybe you should stick with your current mortgage and "cool your jets"...?

[waltworks]

I'd leave it be. Your rate is great. You take on a bunch of risks (and close off some options for yourself in the future if you don't move) with the ARM and I don't see why you would do that just to save 1%/year or so.

-W