Author Topic: 2.75% Mortgage  (Read 4099 times)

Chris Pascale

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2.75% Mortgage
« on: August 09, 2019, 12:22:32 AM »
Saw a thread about re-fi-ing and wanted to share an approach I used that might help someone.

When buying my house for $310,000 in August, 2014, the closing costs were a little steep for me, and since I was getting a 30-year loan to start, knew I'd re-fi to a 15 eventually. So, I opted for lower closing costs and a 4.375% rate. Less than 2 years later I re-fi'd to a 15-year loan, opting to get a discount on the rate since the closing costs would be rolled into the mortgage.

I owed about $310,000 again (payment was about the same), and the rate is 2.75%.

nereo

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Re: 2.75% Mortgage
« Reply #1 on: August 09, 2019, 04:49:51 AM »
I'm not sure I'm following.  You spent two years making mortgage payments but now you have the same amount owed, only you are locked into a 15y @ 2.75%?

So if I've done my math right you paid $37k over that two year period to go down to a 2.75%, but the total amount you owe did not change, and now your mortgage payment has jumped by another $600?

What is the advantage in this?

ender

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Re: 2.75% Mortgage
« Reply #2 on: August 09, 2019, 04:55:12 AM »
Yeah, I'm a little confused too.

A Fella from Stella

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Re: 2.75% Mortgage
« Reply #3 on: August 09, 2019, 06:47:31 AM »
You never make much headway on the first year or so of a 360 month loan.

Are you advocating for getting into a house sooner, or the savings of 4 3/8% compared to 2 3/4%, or just the 180 month loan timeline, which knocks down the principle more quickly?

The interest rate change looks like it created a savings of more than $4,000 a year, so you got the closing costs back in year 2, I imagine, but what was the prime rate you could have gotten in 2014?

It's cool you built up the equity you have. Hopefully, there's appreciation to match.

Chris Pascale

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Re: 2.75% Mortgage
« Reply #4 on: August 09, 2019, 02:27:04 PM »
You guys are all pretty much correct. This is by no means a hack for the sophisticated, but it's something that I think can benefit a lot of people.

Answering Q's

Yes, I had a 30-year mortgage, so paid down hardly anything in that time. About $500 of each payment paid down the principle. One month I did make a double payment because I'd had an exceptional month with my second job, so when I refinanced, I think I owed about $298,000. With the 15-year loan, about $1,500 pays down the principle.

Yes, I paid plenty of money in interest, insurance, flood insurance (always get flood insurance; I cannot recommend this enough), and property taxes, the last of these were significantly reduced because my wife and I are both disabled veterans. This is among the many reasons that people like JL Collins and Kristy Shen will say that buying a house can be pretty dumb.

I think the prime rate on the 30-year was a little under 4%, but I don't recall. I just remember what I opted for to get the closing costs to something like $6,000. When I refinanced, I did the opposite.

My Main Point

If you're like me and want to buy a home in a HCOL area, and know that the 15-year is better, and that the 30-year stinks, but have to do the lesser of these things to get in the door, it's much easier to get the 15-year when you're in the house.

I liken it to a relative of mine who couldn't afford to buy a home when pretty much anyone was getting a mortgage, so he got two loans, then had some dudes move in with him. It was not the best financial decision, but it worked for him, and will likely work for others.

nereo

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Re: 2.75% Mortgage
« Reply #5 on: August 09, 2019, 06:36:40 PM »
Ok... here's where I think your analysis went a bit off the rails.

Rather than shelling out $37k in two years to do a ReFi at the original note to get a fixed 15y, you would have been about on par financially by keeping the 30y but increasing your mortgage payment to be what you are now paying with a 15y term (i.e. ~$600 extra/month).  You also lose the benefits of holding a 30y through the term.

ThriftyTechie

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Re: 2.75% Mortgage
« Reply #6 on: August 10, 2019, 08:21:36 AM »
That’s a great rate! For those not doing the math, you’re now saving $~$4500/year on interest. You’d be crazy to not refi at this rate difference.  However there was no way to know that rates will go down when you originally got your mortgage.

ender

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Re: 2.75% Mortgage
« Reply #7 on: August 10, 2019, 11:26:22 AM »
Ok... here's where I think your analysis went a bit off the rails.

Rather than shelling out $37k in two years to do a ReFi at the original note to get a fixed 15y, you would have been about on par financially by keeping the 30y but increasing your mortgage payment to be what you are now paying with a 15y term (i.e. ~$600 extra/month).  You also lose the benefits of holding a 30y through the term.

Yeah, I guess the OP doesn't see this.

Basically, they paid $37k as rent (probably a bit more, they said they bought the house for $310k and also rolled closing costs into the mortgage and $37k is just the $310k mortgage) for two years.

Chris Pascale

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Re: 2.75% Mortgage
« Reply #8 on: August 10, 2019, 12:26:49 PM »
Ok... here's where I think your analysis went a bit off the rails.

Rather than shelling out $37k in two years to do a ReFi at the original note to get a fixed 15y, you would have been about on par financially by keeping the 30y but increasing your mortgage payment to be what you are now paying with a 15y term (i.e. ~$600 extra/month).  You also lose the benefits of holding a 30y through the term.

Yeah, I guess the OP doesn't see this.

Basically, they paid $37k as rent (probably a bit more, they said they bought the house for $310k and also rolled closing costs into the mortgage and $37k is just the $310k mortgage) for two years.

In a vacuum, you guys are 100% correct, and I'm sorry I left out that I was paying rent for a few years before this - $2,100/month for a cramped condo for the 6 of us. I was in the condo from April, 2012-August, 2014 (28 months).

Truthfully, I had to jump on this home purchase because so few homes in my area (especially with 5 bedrooms) cost so little. With this house, it was the case because the owners had so many cats, that they actually did not know how many cats they had. True story. We had to rip out all the carpets, sand/finish the floors, and paint, but after that, it was actually okay. Recent appraisal put my home at $481,000.

To answer a next logical Q: Why not move to a more reasonable COL area? We came here to be closer to family, give our kids much better schools, and upon doing so, promised our kids we would not change school districts again.

Chris Pascale

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Re: 2.75% Mortgage
« Reply #9 on: August 10, 2019, 12:27:33 PM »
That’s a great rate! For those not doing the math, you’re now saving $~$4500/year on interest. You’d be crazy to not refi at this rate difference.  However there was no way to know that rates will go down when you originally got your mortgage.

Thanks. It's not anything special, though. If you have excellent credit, and will pay for the discounted rate, you can get it. For me, it's worth it.

A Fella from Stella

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Re: 2.75% Mortgage
« Reply #10 on: August 12, 2019, 06:29:59 AM »
................the owners had so many cats, that they actually did not know how many cats they had..............


Oh. My. God.

I know it's more common than I'd think, but still.

robartsd

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Re: 2.75% Mortgage
« Reply #11 on: November 20, 2019, 05:07:41 PM »
The prime rate in August 2014 was about 3.25%; it was about 3.5% for most of 2016 so the OP's rates are not primarily a function of rate fluctuations.

Thanks. It's not anything special, though. If you have excellent credit, and will pay for the discounted rate, you can get it. For me, it's worth it.
Yes you can pay to get a lower rate, but how much you pay to get the rate varies quite a bit with the prime rate, and there's no way to know what that will be two years later when you want to refinance. August 2016 - August 2018 the prime rate went from 3.5% to 5.0% so the plan to refinance might not have worked out out nearly as well - you would have had to pay much more to get your rate (if it was even possible) if you executed this strategy two years later. Personally, I don't expect the prime rate to fall below 4% again in my lifetime (5% was a low prime rate before the great recession).

RWD

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Re: 2.75% Mortgage
« Reply #12 on: November 20, 2019, 08:30:42 PM »
My Main Point

If you're like me and want to buy a home in a HCOL area, and know that the 15-year is better, and that the 30-year stinks, but have to do the lesser of these things to get in the door, it's much easier to get the 15-year when you're in the house.
I very much disagree that a 15 year loan is inherently better than a 30 year loan. They each have scenarios for which they are best suited. We went with a 15 year mortgage because we don't expect to stay in this house long enough for the opportunity cost to outweigh the interest savings. But for someone that plans to stay in their house longer (~10+ years) a 30 year is often the better choice.

Chris Pascale

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Re: 2.75% Mortgage
« Reply #13 on: December 05, 2019, 11:27:33 PM »
I appreciate you guys taking the time to dissect this.

Googling the current prime, I'm surprised to see it's 5.5%, which is still favorable. My first home was financed at 5.75% in 2007 and people couldn't believe it was possible (1st time home buyer's program).

The approach works so long as rates don't change dramatically. The 1st home mentioned above was re-fi'd as a rental in 2012 at 3.5%, so from 2012-2014, the rates were steady, per my experience, and then in 2016, they were not much different, either.

Having said that, if I couldn't have done this, I still could have afforded the original 30-year, which, of course, is a crucial factor.

nereo

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Re: 2.75% Mortgage
« Reply #14 on: December 06, 2019, 04:35:16 AM »

Googling the current prime, I'm surprised to see it's 5.5%, which is still favorable. My first home was financed at 5.75% in 2007 and people couldn't believe it was possible (1st time home buyer's program).


Assuming you are in the USA and talking about purchasing a home (not building one with a construction loan) the above is false.
Current 30y fixed sits at about 3.9% and 15y fixed is 3.25%.  It hasn't been above 5% since before the great recession. 
Some people will be given rates above prime (e.g. if they have poor credit scores or scant history). Lenders may even go a few points below this to attract your business.  Jumbo loans (typically ones over $485k in most areas) may be a few points higher.

I recently (2 months ago) got a mortgage for 3.7%

Talking about average or prime rates is meaningless to the individual though - what matters is what rate YOU can get. So I'd contact multiple banks and ask what rate they could give you.  If your credit is above 720 and you have assets I'd be shocked if you couldn't get a rate below 4%.

Chris Pascale

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Re: 2.75% Mortgage
« Reply #15 on: December 11, 2019, 08:59:17 AM »

Googling the current prime, I'm surprised to see it's 5.5%, which is still favorable. My first home was financed at 5.75% in 2007 and people couldn't believe it was possible (1st time home buyer's program).


Assuming you are in the USA and talking about purchasing a home (not building one with a construction loan) the above is false.
Current 30y fixed sits at about 3.9% and 15y fixed is 3.25%.  It hasn't been above 5% since before the great recession. 
Some people will be given rates above prime (e.g. if they have poor credit scores or scant history). Lenders may even go a few points below this to attract your business.  Jumbo loans (typically ones over $485k in most areas) may be a few points higher.

I recently (2 months ago) got a mortgage for 3.7%

Talking about average or prime rates is meaningless to the individual though - what matters is what rate YOU can get. So I'd contact multiple banks and ask what rate they could give you.  If your credit is above 720 and you have assets I'd be shocked if you couldn't get a rate below 4%.

Thanks. I only did a cursory search. Yes, I'm in the US.

Great rate, BTW.