Refinancing worth it?

[afreeman85]

So I just got an e-mail from our original lender from our home purchase this past October, claiming that if I refinance, our monthly payment will go down by $120 and we will save $70,000+ over the life of the loan. It would drop our interest rate from 4.875 to 4.375.

Also, included this:

I will issue a lender credit to cover the lender fee, appraisal fee and title fees- you will not have any net out of pocket costs.  The money needed at closing will be interest, and tax/ insurance to start the new escrow account.  Any money in your existing escrow account will be refunded to you after the refinance closes.  I’ll walk you through the process.

After looking through their packet, it says we will have $5000 in settlement charges. It seems like after we paid all the closing costs recently, that it might not be worth it to pay more closing costs again so soon. I am completely new to this process and just started reading Mr. MM...so I thought who better to ask than the Mustachian community.

So is the refinancing worth it?

[frugalnacho]

Do you own math to find out exactly how much you will save.  NEVER trust their math, it is likely to be not only deceptive, but often incorrect.  If you don't have or can't find a loan amortization spread sheet I can post one I use.

[Cheddar Stacker]

The $5K settlement charges could be many things. They could also be credited back to you as the letter stated. Need more info.

If your only out of pocket costs are what they state in the quoted portion of your post, they aren't really costs and you have no reason not to do this. If these are fees like lender/appraisal/title fees that aren't refunded/credited then you'd have to run the numbers to figure out when you'd break even.

It's worth getting more information for sure.

[Shivan]

My numbers assume that you started paying on a 30-year $400k loan in November 2013, your current balance is about $395k, and you would lose $5k equity to refinance and start paying on another 30-year $400k loan in September 2014, with an interest rate of 4.375 instead of 4.875.

With the better interest rate, you would save $119.69 on your monthly payment. The savings in cash would break even with the loss of equity in 20 months. Your total savings through 30 years would be $24,000, which could actually be a lot more if you invest the savings.

Note that you can shop around. Look up mortgage brokers for better rates and lower closing costs.

[Mr Mark]

The offer you get from your existing mortgage company is often not the best deal out there.

I would look at no cost refinancing. The rate may not be as good, but usually paying for a lower rate isnt worth it (you should take account of investment portfolio returns on the front payments).

[DarinC]

Shop around. $5k in settlement is nuts. The only thing you really need to pay for is a new title policy I think, which is about 1% of the homes price.

If you can swing it, a 15 year loan will drop your interest rate to something like 3.6% IIRC.

[Radagast]

I just got the exact same letter with the exact same rates today, probably from the exact same bank. Fortunately I talked to them about a refinance 4 days ago. My thought on the letter: Not worth it! The upfront cost will take a very long time to recover, and it will extend your mortgage by several years.

Talk to another bank, and also call your current one, you can probably get a better rate if you want to refi. It will be more paperwork and maybe another appraisal either way.