Refinance with or w/o closing cost?

[FerrumB5]

Hi Folks,

I'm 8 months into my (first and only) mortgage with initial loan of 225k. Right now I have 218k left. Rate is fixed 20yr at 3.625%
I have an option to refinance at a) no closing cost 20yr at 3.375%, or b) $1700 closing cost 20yr at 3.125%
I prepay $120 each month towards principal and not going to drop it (only increase if possible).

Calculations:
1. Current situation
225k at 3.625. Total interest paid = 79956

2. Option a)
218k at 3.375. Total interest paid = 71415 + 6036 (that I already paid to date) = 77451

3. Option b)
218k at 3.125. Total interest paid = 65733 + 6036 (that I already paid to date) = 71769
Add $1700 closing and I'll have 73469

Scenario 2 and Scenario 3 have delta of ~4k. Closing cost of 1700 means that it will take few years to offset it. But what if rates drop to theoretical 2% in the next 1-1.5 years? I'll want to refi again but then I'll never offset the closing cost.

What would you do? Stay with current since "1" and "2" are not very different? Or "2" or "3"?
Or did I miscalculate something?

Thanks!

[dandarc]

Will you be in the house for at least the next 4 years?  If so, you'll come out ahead on the closing costs in interest saved with option 3 compared to option 2.  Option 2 is a no-brainer compared to option 1, unless there is info you're not telling us.

0.25% * 218K = $545 saved per year (roughly) if you take option 3.  You spent $1700 - back of napkin says break-even is a little over 3 years.

[FerrumB5]

Will you be in the house for at least the next 4 years?  If so, you'll come out ahead on the closing costs in interest saved with option 3 compared to option 2.  Option 2 is a no-brainer compared to option 1, unless there is info you're not telling us.

0.25% * 218K = $545 saved per year (roughly) if you take option 3.  You spent $1700 - back of napkin says break-even is a little over 3 years.

That is what I calculated as well. See, however, my comment on "what if rates drop to 1.5%" in next X < 3 years? I'll want to refi again

[FerrumB5]

Extra information: the closing cost will be added to loan amount, raising it to 219700. So if I want  to refi later - I'll always have some of that cost not offset

[dandarc]

Will you be in the house for at least the next 4 years?  If so, you'll come out ahead on the closing costs in interest saved with option 3 compared to option 2.  Option 2 is a no-brainer compared to option 1, unless there is info you're not telling us.

0.25% * 218K = $545 saved per year (roughly) if you take option 3.  You spent $1700 - back of napkin says break-even is a little over 3 years.

That is what I calculated as well. See, however, my comment on "what if rates drop to 1.5%" in next X < 3 years? I'll want to refi again

Understand the sentiment, but if that happens, refinancing will again likely be the play.  The $1700 is a sunk cost at that point - nothing you can do to get that money back, so the correct thing to do is ignore it in making your decision.  So you make the same type of analysis based on the offers you have in front of you at the time.

[tonysemail]

aren't rates at an all time low?  I find it improbable that it would drop another 1.5%.

Does your current mortgage have any early payoff penalty?
the last few times I refinanced, I had to wait until I crossed 12 months of payments to avoid a penalty.

[FerrumB5]

aren't rates at an all time low?  I find it improbable that it would drop another 1.5%.

Does your current mortgage have any early payoff penalty?
the last few times I refinanced, I had to wait until I crossed 12 months of payments to avoid a penalty.

Good point about payoff penalty. Inquiring

Edit: No penalty

[boarder42]

i just do no cost REFI's so i dont have to worry about it ... my broker is quoting me a no cost at 3.25% right now.

[FerrumB5]

i just do no cost REFI's so i dont have to worry about it ... my broker is quoting me a no cost at 3.25% right now.

how many years? how far into mortgage are you now?
I'm just wondering if I want to refi so early (8 months since beginning) - will it affect credit score? does it look bad? etc

[boarder42]

i just do no cost REFI's so i dont have to worry about it ... my broker is quoting me a no cost at 3.25% right now.

how many years? how far into mortgage are you now?
I'm just wondering if I want to refi so early (8 months since beginning) - will it affect credit score? does it look bad? etc

i'm hitting it right at 6 months in coming down for a 3.625 on a 30 year to a 3.25 on a 30 year.  shouldnt really affect anything.  my first house i Refi'd 4 times over 3 years.

[mozar]

Why are those your only options?  I'm seeing 2.6% for 15 years on quicken. I would be more likely to do 3, but I would see if I have to wait 12 months first. It also seems very possible that rates will keep falling.

[boarder42]

Exactly why I'm doing a no cost. I think rates continue down.

[FerrumB5]

This is like playing with the market - if we all knew it would go up or down, we all would be FIRE by now.

[FerrumB5]

So, here are the numbers for the mortgages:
1. Original. Total interest = 91657
2. Original w/ prepay 1/12 = 80064 (total monthly = $1439 + escrow)
3. New %3.375 w/ 189 prepay (to match 1439) + what was paid already = 72508
4. New %3.125 + 1700 add to loan w/ 207 prepay (to match 1439) + what was paid already = 66743
5. New %3.125 + 1700 upfront w/ 217 prepay (to match 1439) + what was paid already = 67298

[boarder42]

So, here are the numbers for the mortgages:
1. Original. Total interest = 91657
2. Original w/ prepay 1/12 = 80064 (total monthly = $1439 + escrow)
3. New %3.375 w/ 189 prepay (to match 1439) + what was paid already = 72508
4. New %3.125 + 1700 add to loan w/ 207 prepay (to match 1439) + what was paid already = 66743
5. New %3.125 + 1700 upfront w/ 217 prepay (to match 1439) + what was paid already = 67298

you're doing this math all wrong.  you shouldnt be comparing total interest.  and you really shouldnt be prepaying at any of these rates. 

its a simple math equation to figure out how to REFI.

take your current loan balance at your current rate and put it in the google mortgage calculator then take your new rate and current balance and put it in that calc.  take the difference in the 2 multiply it by 12 thats your annual savings at the new rate.  now if you're doing a no cost obviously the REFI wins.

If you're doing a cost loan you take your cost to REFI divided by your annual savings and this gives you your payoff window. 

at this point its a gamble you can only REFI every 6 months typically.  so now you have to decide do i think rates continue down and just do the no cost and if they go down i'll REFI again in 6 months ... or do you think they will recover and you can not REFI in 6 months or anytime during your payback window. 

thats where this choice lies ... i'd quit looking at total interest b/c its not relevant IMO.

[FerrumB5]

So, here are the numbers for the mortgages:
1. Original. Total interest = 91657
2. Original w/ prepay 1/12 = 80064 (total monthly = $1439 + escrow)
3. New %3.375 w/ 189 prepay (to match 1439) + what was paid already = 72508
4. New %3.125 + 1700 add to loan w/ 207 prepay (to match 1439) + what was paid already = 66743
5. New %3.125 + 1700 upfront w/ 217 prepay (to match 1439) + what was paid already = 67298

you're doing this math all wrong.  you shouldnt be comparing total interest.  and you really shouldnt be prepaying at any of these rates. 

its a simple math equation to figure out how to REFI.

take your current loan balance at your current rate and put it in the google mortgage calculator then take your new rate and current balance and put it in that calc.  take the difference in the 2 multiply it by 12 thats your annual savings at the new rate.  now if you're doing a no cost obviously the REFI wins.

If you're doing a cost loan you take your cost to REFI divided by your annual savings and this gives you your payoff window. 

at this point its a gamble you can only REFI every 6 months typically.  so now you have to decide do i think rates continue down and just do the no cost and if they go down i'll REFI again in 6 months ... or do you think they will recover and you can not REFI in 6 months or anytime during your payback window. 

thats where this choice lies ... i'd quit looking at total interest b/c its not relevant IMO.

Why should I not compare total interest? That is the money I will be paying to the bank after all plus the principal. It's a different question if I should prepay or not - there are hundreds of threads on that. I understand your point on year savings of one loan vs another, but if you compare the total amount you pay to the bank - the lower interest loan wins.

[boarder42]

So, here are the numbers for the mortgages:
1. Original. Total interest = 91657
2. Original w/ prepay 1/12 = 80064 (total monthly = $1439 + escrow)
3. New %3.375 w/ 189 prepay (to match 1439) + what was paid already = 72508
4. New %3.125 + 1700 add to loan w/ 207 prepay (to match 1439) + what was paid already = 66743
5. New %3.125 + 1700 upfront w/ 217 prepay (to match 1439) + what was paid already = 67298

you're doing this math all wrong.  you shouldnt be comparing total interest.  and you really shouldnt be prepaying at any of these rates. 

its a simple math equation to figure out how to REFI.

take your current loan balance at your current rate and put it in the google mortgage calculator then take your new rate and current balance and put it in that calc.  take the difference in the 2 multiply it by 12 thats your annual savings at the new rate.  now if you're doing a no cost obviously the REFI wins.

If you're doing a cost loan you take your cost to REFI divided by your annual savings and this gives you your payoff window. 

at this point its a gamble you can only REFI every 6 months typically.  so now you have to decide do i think rates continue down and just do the no cost and if they go down i'll REFI again in 6 months ... or do you think they will recover and you can not REFI in 6 months or anytime during your payback window. 

thats where this choice lies ... i'd quit looking at total interest b/c its not relevant IMO.

Why should I not compare total interest? That is the money I will be paying to the bank after all plus the principal. It's a different question if I should prepay or not - there are hundreds of threads on that. I understand your point on year savings of one loan vs another, but if you compare the total amount you pay to the bank - the lower interest loan wins.

the issue with calcing that way is you must take the loan to term.  so the lowest rate will always win. but you have to account for the "what if rates continue down"

alright so if you're just looking at your 2 options to REFI then total interest comes into play ONLY if you do not REFI again before the pay back period is up ... it would essentially be lost money.  so calculate what the difference is between 3.375% and 3.125% then determine your pay back.  then its up to you to decide if you want to buy that quarter point now or wait / hope rates decrease more and REFI in 6 months.  thats a personal decision at this point i think you have to REFI either way its just a matter of if you want to buy those two points and if you personally think rates will bounce back up and you will not be able to REFI again to a lower rate.

[boarder42]

personally i think rates continue down look at the 10 year yields everywhere else. thats why i'm not buying any points.  i'm just letting my broker make a little extra.