Refi or not to Refi

[brooklynmoney]

I know this isn't a unique or probably that interesting a question, but here it goes. I have only until tomorrow to decide (appraiser coming Monday am). I have $303,000 left on a $337,500 30 year mortgage. I'm about 2.5 years in and the rate is 4%. The refi would be to a 30 year at 3.62%. The closing cost estimate is $3600 (it's a condo in Brooklyn. I don't think I can find cheaper). Since month 1 I have prepaid $500 principal. I plan to continue to prepay $500 a month. I am in the 33% tax bracket. I max out my 401K and IRA (not tax deductible) each year and save at least $1K a month in my taxable account, usually more.  I prepay my mortgage as I guess kind of a hedge so I'm not dumping all of my savings into the market. I have enough in cash/stocks to pay the whole thing off right now if I want to, but have no desire to do so. I do plan to continue to prepay the $500 a month. I was thinking it could be good to lower my monthly required payment because if I decide to career change which I would like to in a few years, then I can take a pay cut and still be able to pay from my earnings and not have to tap savings. I have played with a bunch of calculators and get a different estimate for savings for each which is why I'm unsure if this is worth it. Also, I plan to keep this condo. If I move someday, I will use it as a rental property.

[frugaliknowit]

You are looking at a mere 0.38% rate reduction.  Back of the envelope says a good 3 year break even scenario.  Are you sure you are keeping the place?  Not really a compelling case for refinancing, especially since you do a lot of prepaying.  Also, you just paid a bunch of fees 2.5 years ago...

Keep in mind your monthly payment does not get lowered as your principal goes down.  When you prepay, you are essentially "throwing money down a hole" that provides long term savings, but little or no chance of recovering the cash.  You might want to consider alternatives to this.

[brooklynmoney]

That's really helpful frugaliknowit. Thanks.

[rmendpara]

I know this isn't a unique or probably that interesting a question, but here it goes. I have only until tomorrow to decide (appraiser coming Monday am). I have $303,000 left on a $337,500 30 year mortgage. I'm about 2.5 years in and the rate is 4%. The refi would be to a 30 year at 3.62%. The closing cost estimate is $3600 (it's a condo in Brooklyn. I don't think I can find cheaper). Since month 1 I have prepaid $500 principal. I plan to continue to prepay $500 a month. I am in the 33% tax bracket. I max out my 401K and IRA (not tax deductible) each year and save at least $1K a month in my taxable account, usually more.  I prepay my mortgage as I guess kind of a hedge so I'm not dumping all of my savings into the market. I have enough in cash/stocks to pay the whole thing off right now if I want to, but have no desire to do so. I do plan to continue to prepay the $500 a month. I was thinking it could be good to lower my monthly required payment because if I decide to career change which I would like to in a few years, then I can take a pay cut and still be able to pay from my earnings and not have to tap savings. I have played with a bunch of calculators and get a different estimate for savings for each which is why I'm unsure if this is worth it. Also, I plan to keep this condo. If I move someday, I will use it as a rental property.

Assuming closing costs are your only expense, you will earn back your closing costs through interest expense savings in just over 3 years.

4-3.62 = 0.38% savings each year

On a 303k balance, that's $1.15k interest saved each year... so just over 3 years will save you the closing costs.

Once you're at 3.62%... pay the minimum forever!!!

[Wile E. Coyote]

Take a look at what the rate on a 15 year mortgage would be.  If you can get it down to around 3.13, your payment should be the same as what you are currently paying with the additional $500 principal payment you have been paying and you will be done sooner due to the lower rate.  Of course, you won't have the option of not paying the $500 extra each month, but it's worth considering.

[brooklynmoney]

Thanks everyone for responding it helped relieve my stress because I feel now there is no right answer per se so whatever I decide will be fine.

[Bob W]

I know this isn't a unique or probably that interesting a question, but here it goes. I have only until tomorrow to decide (appraiser coming Monday am). I have $303,000 left on a $337,500 30 year mortgage. I'm about 2.5 years in and the rate is 4%. The refi would be to a 30 year at 3.62%. The closing cost estimate is $3600 (it's a condo in Brooklyn. I don't think I can find cheaper). Since month 1 I have prepaid $500 principal. I plan to continue to prepay $500 a month. I am in the 33% tax bracket. I max out my 401K and IRA (not tax deductible) each year and save at least $1K a month in my taxable account, usually more.  I prepay my mortgage as I guess kind of a hedge so I'm not dumping all of my savings into the market. I have enough in cash/stocks to pay the whole thing off right now if I want to, but have no desire to do so. I do plan to continue to prepay the $500 a month. I was thinking it could be good to lower my monthly required payment because if I decide to career change which I would like to in a few years, then I can take a pay cut and still be able to pay from my earnings and not have to tap savings. I have played with a bunch of calculators and get a different estimate for savings for each which is why I'm unsure if this is worth it. Also, I plan to keep this condo. If I move someday, I will use it as a rental property.

Assuming closing costs are your only expense, you will earn back your closing costs through interest expense savings in just over 3 years.

4-3.62 = 0.38% savings each year

On a 303k balance, that's $1.15k interest saved each year... so just over 3 years will save you the closing costs.

Once you're at 3.62%... pay the minimum forever!!!

agreed