Author Topic: Does a no cost refi make sense for us right now?  (Read 2392 times)

fallstoclimb

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Does a no cost refi make sense for us right now?
« on: July 29, 2016, 11:33:24 AM »
Before anyone jumps in and says this:  yes, I know there is not really any such thing as a "no cost" refinance.  In this case, I assume the costs are being rolled into the interest rate, because the loan amount is not increasing.  I will of course read all fine print.

The interest rate is still lower than what we pay now (although just a bit).  We run light on cash like many MMMers and I wasn't planning on refinancing until a personal referral dropped this offer in my lap, so we really don't have the money to pay closing costs upfront.  We're maxing our Roths and my retirement fund but only have about 13K in the efund (I'd like this to be closer to 20K and we are inching our way there).

Currently our P+I is $1330 and we are 3 years into a 30-year loan @ 3.75%.  I calculated that over the remainder of the loan we will pay $160,000 in interest.

If we refinance to a 25-year mortgage, our P+I will only increase to $1350, and we can get a loan rate of 3.5%.  That's obviously not much of a drop but I calculated that we will pay about $25,000 less in interest over the life of the loan. 

One hitch: When we first bought our house 3 years ago, we didn't have 20% and we wound up pre-paying the PMI at closing.  (Houses are very expensive in my area, although we did buy well within our means).  In retrospect this may not have been the best decision, but the past is the past.  However, if we refinance, we will have to add a monthly PMI payment of $40 a month until we hit 20% equity.  Depending on what our appraisal comes in at, we aren't too far off but likely it'll take another couple of years before we get there.  I'm not too worried about paying $40x24=$960, or even twice that, when we are looking at saving $25,000 in mortgage interest.

Some other details:

- I think we will stay in the house for at least another 8 years.  I can't make any projections beyond that date.  We have no interest in upsizing but downsizing is a possibility -- but it's possible, or maybe even likely, that we would rent out our house rather than sell it.

- Regardless of the refi, I think we are going to switch from monthly payments to biweekly to save more on the interest paid.

So any thoughts on this?  Is there anything I'm missing?  A lot of guidance online said not to do it but in my mind the numbers work out.  We might be able to get a lower interest rate if we paid closing costs upfront, but we don't have the cash right now.  And if saved up the cash or waited until we had 20% equity, rates might go back up.  So it seems smart to do this -- right?

boarder42

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Re: Does a no cost refi make sense for us right now?
« Reply #1 on: July 29, 2016, 12:34:34 PM »
where are you located i have a buddy that only has 5% of his house owned and is REFIing to 3.5% with no cost and they are eating the PMI.

Slee_stack

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Re: Does a no cost refi make sense for us right now?
« Reply #2 on: July 29, 2016, 01:16:20 PM »
PMI is evil incarnate.  Avoid it by just about any means necessary.

That said, it becomes relatively simple math to figure out what the better route is.

If you are confident in your calculations, you know the answer.

On the surface, I don't like the refi plan.  Too little savings on rate.

fallstoclimb

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Re: Does a no cost refi make sense for us right now?
« Reply #3 on: July 30, 2016, 05:45:20 AM »
We're in Baltimore.

@slee_slack, that's the kind of rhetoric that has me hesitating on this, but I don't GET it. A lower rate is a lower rate, right? 

MrRealEstate

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Re: Does a no cost refi make sense for us right now?
« Reply #4 on: July 30, 2016, 06:25:31 AM »
Also take into account your income tax rate, you're actually saving less than the face value of your interest because its tax deductible.

frugaliknowit

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Re: Does a no cost refi make sense for us right now?
« Reply #5 on: July 30, 2016, 08:29:15 AM »
"... I calculated that we will pay about $25,000 less in interest over the life of the loan..."

You need to weigh the cost savings over the length of period you are likely to keep the mortgage.  Is the 20 year rate with all costs built in ("no cost")?  How much is the application fee?  Would that rate be locked or does it float during the application process (in which case it could float to 3.75+)? 

CanuckExpat

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Re: Does a no cost refi make sense for us right now?
« Reply #6 on: August 01, 2016, 06:24:07 PM »
Did you get competitive rates by looking online, or are you just going with the personal referral?

fallstoclimb

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Re: Does a no cost refi make sense for us right now?
« Reply #7 on: August 01, 2016, 06:49:35 PM »
I'm literally just going with the personal referral. I have zero to no time to deal with this right now and it just fell in my lap. I'm sure I could get a better rate if we paid closing costs upfront, or maybe even just if we shopped around, but we are in a high stress period of time and can't do that right now.

But the wins on the offer in my lap seem obvious, no?  It's an improvement from what we currently have so I see no reason not to move forward -- responses here are basically exemplifying my confusion with this. Why are "the savings not enough"?  Aren't any savings worth it?

CanuckExpat

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Re: Does a no cost refi make sense for us right now?
« Reply #8 on: August 01, 2016, 06:57:31 PM »
My thinking was you could get much better savings, at no cost, by getting competitive rates online.
No cost refinances exist,and you can save money, but there is still work involved in paperwork, appraisal, credit check, etc.

If you are going to do it, go for rock bottom rates.

Another Reader

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Re: Does a no cost refi make sense for us right now?
« Reply #9 on: August 01, 2016, 07:05:54 PM »
Just because something dropped in your lap and you are very busy is not a reason to do this.  Spend half an hour checking rates and terms on-line.  This is not a particularly good deal and if you take the time to think it through, you will likely choose another loan.

Remember, you are not "saving" $25,000 in interest.  You are forgoing the earnings on the extra money paid over the shorter term of the loan.  There may be no savings at all.

In your shoes, I would prioritize the research to make the best financial decision for the next 8 years.  Spend two or three hours to look at ALL your options and talk to lenders.  Your hourly "rate" will be very high.