Don't Refinance, just invest. Right?!

[FIREandMONEY]

Quick question on if it's worth it to refi or not.

Currently have a 30 year @ 3.25% with 189K left.  Started in 2016 and have made a few extra payments to principal and currently have 21 years left on the mortgage.  I just did what I read on the old MMM blog and have basically been putting any extra windfalls like Xmas bonuses directly to principal.  I think now that I have PMI done, I will stop making any extra bonus payments.

My lender came to me and offered a 20 year @ 2.75% with $3500 in closing costs.  I ran the numbers through an amortization spreadsheet and it showed I would break even at around 45 months and pay $12.5K less interest at the end of the loans with the refi.

But when I stick $3500 in a compound interest calculator @ 7% over 20 years, I come up with $13.5K.

Am I thinking of this right?  Realistically, I view the 13 or 12K whatever as a wash over twenty years.  So basically, I shouldn't even bother wasting my time refinancing a a half point with $3500 closing costs right? 

Thank you for any responses.

[beekayworld]

You're only running the initial $3500 through the calculator.  But the refi option will give you extra money to invest beyond $3500. You'll recoup the $3500 at the 45 month mark.

The money you SAVE each month on the mortgage payment (I'm assuming $77.78 since that's $3500/45) could be put into an account and would be compounding as well.  So by the end of 45 months, you would have $3500 PLUS whatever all of the compounding added.

From then on, not only is the $3500 compounding, but you are ADDING $78 more each month in the refi scenario.

$78 per month X 12 monthsX 16 years= $14,976 without even factoring in any interest.

[FIREandMONEY]

You're only running the initial $3500 through the calculator.  But the refi option will give you extra money to invest beyond $3500. You'll recoup the $3500 at the 45 month mark.

The money you SAVE each month on the mortgage payment (I'm assuming $77.78 since that's $3500/45) could be put into an account and would be compounding as well.  So by the end of 45 months, you would have $3500 PLUS whatever all of the compounding added.

From then on, not only is the $3500 compounding, but you are ADDING $78 more each month in the refi scenario.

$78 per month X 12 monthsX 16 years= $14,976 without even factoring in any interest.

Thank you for the response!

The P&I Payment that my lender is quoting me is practically the exact same.  I think it went up by $1 per month.  The original loan was $235,500 at 3.25% over 30 yrs.  The new loan would be $189,500 at 2.75% over 20 yrs.  They are both ~$1,025 per month for the payment. 

Would you comment still apply with this new info?  Sorry I left it out.

[beekayworld]

So you can pay $1025 per month for 21 years
or
you can spend pay $1025 per month for 20 years (at an upfront cost of $3500).

Saving the $3500 expense right now in today's dollars is more valuable than saving $12,300 in the 21st year.  (12 * 1025), as you will have $13,500 by investing the 3.5k right now and letting it grow for 20 years. (even more if you use 21 years to make the comparisons fair).

What did you mean by being able to recoup the $3500 in 45 months?

[beekayworld]

I personally would compare various lenders on-line, not having loyalty to the current lender, and refi a new 30 year loan with little or no up-front costs. Invest the difference between the current mortgage  payment and the new mortgage payment.  The mortgage will be locked in at the today's dollars amount.

[Dicey]

I agree that shopping for better terms is the first best step. A new, cheap 30 year loan could be an even better option.
Try asking your question over on the DPOYM thread. They're a smart, friendly bunch.

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

[getmoneyeatpizza]

what percent of the closing costs are loan costs? that's the number you care about. you'll get back escrow and prepaids if you sell.

can they give you a lender credit at 3% and put no money down / roll in closing costs so that you are ahead from day 1?

[Mustache ride]

I highly recommend reading this bogleheads thread:

https://www.bogleheads.org/forum/viewtopic.php?f=2&t=289559

There are much better rates out there. I'm in the process of a refi now with Better, and on track to close within two weeks. I signed up for an Amex card and will be getting paid about $2600 for the refi while going from 3.87% to 2.75% which drops my payments by about $200-300 a month.

[Another Reader]

Did your current lender make you an unsolicited offer?  They are conning you into an above market rate and terms by showing you the payment. If yours is a simple refi of a conventional loan, get a quote from aimloan.com. A $190000 refi with a 20 year term and no cash out in the Bay Area is quoted at 2.500 percent with total closing costs of $2200.  Then shop a couple of other brokers if you like for comparison.

[Another Reader]

If this is owner occupied with a loan to value of 80 percent or less and excellent credit, I would expect better.  Which lenders did you try?

[getmoneyeatpizza]

Go to Bankrate and enter in your info. You need to click the "All results" tab. Then sort on $0 closing.

Focus on loan costs not other closing like prepaids and escrow. I'm seeing 2.625 for my house for a 30 yr at 0.

 I just refied to a 20 yr at the same rate.

[AccidentialMustache]

"They" (the bank) aren't crazy. They will get paid either way, because they'll ship the lower rate off to fannie or freddie or other investors. The lower rate is "someone else's problem" -- but they'll get their fees and cut.