Author Topic: Is there a rule of thumb for when it makes sense to refinance?  (Read 5897 times)

neophyte

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Like the title says, is there a simple rule of thumb? Like, if you can save 0.1% or more then it makes sense?  I've got a pretty good rate, but it looks like they are starting to drop even lower.  I'm lazy, I don't want to figure out all the fees and then do the math. 

Thanks!

ctuser1

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #1 on: March 04, 2020, 07:13:40 AM »
Like the title says, is there a simple rule of thumb? Like, if you can save 0.1% or more then it makes sense?  I've got a pretty good rate, but it looks like they are starting to drop even lower.  I'm lazy, I don't want to figure out all the fees and then do the math. 

Thanks!

There is no universal one.

Here is a calculator I have used in the past: https://www.nerdwallet.com/mortgages/refinance-calculator/calculate-refinance-savings
(disclaimer: I hate how it does not show the actual calculations - just spits out the numbers. Maybe someone else can find a better calculator somewhere, or maybe even cobble together an actual spreadsheet).

I, personally, have set rate watch for half a percent difference. My current mortgage rate is 3.25%, for a 15 year-fixed loan, of which 12 years are left.

If 15-year-fixed drops below 2.75% with 0 points and no more than $2k closing fees - I'll seriously work on refinancing.
If 10-year mortgage drops sufficiently such that my monthly payments stay same, with no more than $2k closing costs - then I'll do that.

I am not in a hurry to pay my mortgage off. Government subsidized (in the form of implicit backing of Fannie/Freddie) non-callable loan @~3.25% or lower is sweet. I'll take millions in leverage in those terms if it was available to me. The calculations will most probably be different if you think differently.

Alternatepriorities

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #2 on: March 04, 2020, 11:57:03 AM »
I built this simple little sheet to compare refinancing options recently and have since used it to help some friends look at their options.

To use:
Row 2: Enter your current mortgage principle and interest only for comparison.
Row 3 Find a zero cost refi (I used MMM's credible link) that is hopefully at a lower rate then your current mortgage. Since the ROI is positive the first month this should be a no brainer... Unless there is an option that pays off even better over more months but less time than you plan to hold the mortgage.
Each additional rate option is therefore compared against both the current rate and the no cost refi rate. Enter as many options as you'd like though I stopped at line row 10.
Column C: Enter closing cost for each loan option
Column D: This is the savings column compared to your existing mortgage.
Column E: Is how many months it will take to come out ahead of your existing mortgage.
Column F:  Is how many months until it comes out ahead of the zero cost refinance.

Pick the option that best matches your current plans for life.

Aegishjalmur

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #3 on: March 04, 2020, 04:14:20 PM »
Pretty much echoing Alternate priorities.

Just as a fun fact, many mortgage lenders won't approve a loan if you don't hit at lest one of a list of benefits. ex: 1). Going from an ARM to a fixed rate. 2). Reducing interest rate by X and Recouping closing costs plus $$ within a certain time frame. If you want to know more, try looking up FNMA or Fdmc Benefit to borrower guidelines.


Personally, for me, for a rate term refinance(under $2K back at closing) I would need to be able to recoup closing costs plus at least $100 per month within a few(5 at very most) years before it would be worth the headache.




norajean

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #4 on: March 04, 2020, 05:10:52 PM »
It makes sense when the net present value of the refinanced mortgage is positive. You can calculate if you know the terms of the existing and refinanced mortgages and how long you will keep the property.

Duke03

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #5 on: March 04, 2020, 07:01:48 PM »
Like the title says, is there a simple rule of thumb? Like, if you can save 0.1% or more then it makes sense?  I've got a pretty good rate, but it looks like they are starting to drop even lower.  I'm lazy, I don't want to figure out all the fees and then do the math. 

Thanks!

There is no universal one.

Here is a calculator I have used in the past: https://www.nerdwallet.com/mortgages/refinance-calculator/calculate-refinance-savings
(disclaimer: I hate how it does not show the actual calculations - just spits out the numbers. Maybe someone else can find a better calculator somewhere, or maybe even cobble together an actual spreadsheet).

I, personally, have set rate watch for half a percent difference. My current mortgage rate is 3.25%, for a 15 year-fixed loan, of which 12 years are left.

If 15-year-fixed drops below 2.75% with 0 points and no more than $2k closing fees - I'll seriously work on refinancing.
If 10-year mortgage drops sufficiently such that my monthly payments stay same, with no more than $2k closing costs - then I'll do that.

I am not in a hurry to pay my mortgage off. Government subsidized (in the form of implicit backing of Fannie/Freddie) non-callable loan @~3.25% or lower is sweet. I'll take millions in leverage in those terms if it was available to me. The calculations will most probably be different if you think differently.

https://www.rbfcu.org/rates

Click on the promo Refinance.... you can get an 11 year for 2.45%.... FYI closing cost will be about $1100 as long as you have at least 10% equity.... You're Welcome!!

Telecaster

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #6 on: March 04, 2020, 07:15:25 PM »
First, obviously you see if a refi saves you money over the length of time you intend to own the home.

But if you don't know that--which a lot of people don't--then my rule of thumb is if you save $100 in interest/month. 

ctuser1

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #7 on: March 04, 2020, 07:45:24 PM »

https://www.rbfcu.org/rates

Click on the promo Refinance.... you can get an 11 year for 2.45%.... FYI closing cost will be about $1100 as long as you have at least 10% equity.... You're Welcome!!

Thank you. this is a great rate.

I don't seem to be able to join online as they won't even accept my zip code (in CT) as a valid one.
I'll make a call tomorrow and see what they say.

Duke03

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #8 on: March 05, 2020, 05:33:03 AM »

https://www.rbfcu.org/rates

Click on the promo Refinance.... you can get an 11 year for 2.45%.... FYI closing cost will be about $1100 as long as you have at least 10% equity.... You're Welcome!!

Thank you. this is a great rate.

I don't seem to be able to join online as they won't even accept my zip code (in CT) as a valid one.
I'll make a call tomorrow and see what they say.

Call them they can do a mortgage any where.  They are the largest credit union in Texas and are awesome to deal with.  I've had 3 mortgages with them no issues at all.

kenmoremmm

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #9 on: March 05, 2020, 02:35:06 PM »
i don't think it needs to be complicated. roll in all closing costs into total loan balance. then, see what new P&I is compared to old P&I. take the delta in your outstanding loan balance and divide by the delta in P&I and this is your # of months 'til breakeven.

ctuser1

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #10 on: March 06, 2020, 08:13:43 AM »

https://www.rbfcu.org/rates

Click on the promo Refinance.... you can get an 11 year for 2.45%.... FYI closing cost will be about $1100 as long as you have at least 10% equity.... You're Welcome!!

Thank you. this is a great rate.

I don't seem to be able to join online as they won't even accept my zip code (in CT) as a valid one.
I'll make a call tomorrow and see what they say.

Call them they can do a mortgage any where.  They are the largest credit union in Texas and are awesome to deal with.  I've had 3 mortgages with them no issues at all.

I managed to finally get through somebody (they must be slammed with all the refinance requests now, so it seems to be very difficult to get a person on the line).
 
The bad news is - the person on the phone told me they only do mortgage financing in Texas!!

But, not to lose hope, the mortgage rates are nosediving everywhere. I see a lot of < 3% options already at DCU using this https://dcu.mortgagewebcenter.com/CheckRates. When I was house-hunting back in 2016, my "pre-approval" letter had an APR of 2.38% (APR includes closing costs). The 10Y yields are lower now than it was during that time. So I am hoping we will see rates lower than that soon.

Thank you for the pointer to RBFCU. I hope some of our Texas mustachians will be able to take advantage of the awesome rate.

SeattleCPA

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #11 on: March 11, 2020, 07:01:39 AM »
Maybe I missed it above, but I think the three rules of thumb are:

1. Replace higher interest rate debt with lower interest rate debt. (You can determine this by comparing the APR on the new new (so the interest rate plus the add-on costs) to the interest rate on your existing loan.

2. Don't extend the term and thereby borrow money for longer. (Example of worst case scenario: Dropping rates mean you're always refinancing every few years... and so even two decades into home ownership, you're still looking at 30 years of mortgage payments.)

3. Don't use refinancing to cash equity out. First, that screws up your mortgage interest deduction. Second, paying 3% on a $100,000 (so $3,000 in interest) is worst than paying 5% on $50,000 (so $2,500 in interest.)

kenmoremmm

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #12 on: March 11, 2020, 11:07:41 AM »
2. Don't extend the term and thereby borrow money for longer. (Example of worst case scenario: Dropping rates mean you're always refinancing every few years... and so even two decades into home ownership, you're still looking at 30 years of mortgage payments.)
but this goes against the advice of the DPOYM club...

PVkcin

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #13 on: March 23, 2020, 02:57:10 PM »
I'm piggybacking on this thread because I have a related question.
I am a mortgage/refi newbie in the sense that I've only ever done a refi and mortgage with the same bank - it's my local credit union.

We just moved and bought a new house in September so it's only been 6 months since we just got our current mortgage. We have a 30 year at 3.625%.

I was just looking into refinancing since rates seem to be lower, maybe significantly enough to refinance.
Turns out my local credit union charges a lot in fees - for me to refinance, it would basically cost me the same as I paid for the mortgage, around $4,000 in closing costs/fees. I started researching around here and realizing people are getting way better deals - like paying around $1000 or even no cost refis. My credit union said to refi they would only waive my appraisal fee but the rest of the fees would remain (so still around $4,000 to refinance).


The catch is, they let me pay my mortgage with my credit card every month!

So for the past 6 years (previous home, plus now this new one) I have been getting all the benefits of credit card churning/points because I get to put the mortgage on my CC every month. It helps us easily meet minimum spend requirements, like when some CC require you to spend $5-6k in 90 days - it's easy with our mortgage on there. Or when we aren't churning and i'm just using my 1.5% cash back card, we get to benefit from that.

So it's hard to compare because if I refinance at a different bank say for example, that only charges $1,000 for closing a refi vs my credit union wanting to charge $4,000 to refi.

I fee stuck as how to compare so many moving parts.

Just checking here to see if anybody has any advice or thoughts?

Thank you!

Engineer93

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #14 on: March 29, 2020, 06:10:53 AM »
Another re-finance question here.  Current mortgage is 2 years into a 15 year mortgage for $280,000 which is $2,000 a month before taxes.  It's also with a national mortgage company.  The local credit union that I've been a member of my whole life has 15 year mortgages at 2.87% which for the $250,000 remaining on my mortgage would be $1700 a month before taxes.  If it matters our income this year will be around $180,000. 

waltworks

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #15 on: March 29, 2020, 06:55:30 PM »
Another re-finance question here.  Current mortgage is 2 years into a 15 year mortgage for $280,000 which is $2,000 a month before taxes.  It's also with a national mortgage company.  The local credit union that I've been a member of my whole life has 15 year mortgages at 2.87% which for the $250,000 remaining on my mortgage would be $1700 a month before taxes.  If it matters our income this year will be around $180,000.

What is the question?

-W

Engineer93

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #16 on: March 30, 2020, 05:47:57 AM »
Another re-finance question here.  Current mortgage is 2 years into a 15 year mortgage for $280,000 which is $2,000 a month before taxes.  It's also with a national mortgage company.  The local credit union that I've been a member of my whole life has 15 year mortgages at 2.87% which for the $250,000 remaining on my mortgage would be $1700 a month before taxes.  If it matters our income this year will be around $180,000.

What is the question?

-W

Should I refinance?  Obviously there's other factors like closing costs, etc. but I don't know that information yet.

waltworks

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #17 on: March 30, 2020, 07:21:58 AM »
What's the rate on the old mortgage? What's your financial/housing situation (ie, how long do you think you'll stay)? What would closing costs be?

Think like an engineer! :)

-W

Farmer123

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #18 on: August 28, 2020, 07:36:35 AM »
I got offered 2.875% for a 30 year yesterday with closing costs of $1750 ($1450 if I open a checking account with them) ... currently at 3.55% and this would lower my payment by about $130/month. This is a no brainer, right?

Oreivatis

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #19 on: August 28, 2020, 10:34:32 AM »
I got offered 2.875% for a 30 year yesterday with closing costs of $1750 ($1450 if I open a checking account with them) ... currently at 3.55% and this would lower my payment by about $130/month. This is a no brainer, right?

Is that the APR or rate? Is that $1750 just origination, or including title/appraisal/recording? Sounds like your break even is about a year if those are your total costs.

Chris Pascale

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #20 on: August 28, 2020, 02:50:17 PM »
I got offered 2.875% for a 30 year yesterday with closing costs of $1750 ($1450 if I open a checking account with them) ... currently at 3.55% and this would lower my payment by about $130/month. This is a no brainer, right?

So in less than a year you get your money back on the closing.

You should also do a calc on how much faster the home will be paid off if you keep paying the $130. The savings will be greater when you're making so many less payments.

Farmer123

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Re: Is there a rule of thumb for when it makes sense to refinance?
« Reply #21 on: August 30, 2020, 10:00:32 AM »
I am taking the 2.875%. Hard to pass that up especially with refinancing costs going up starting in December.
If i keep paying the $130 each month plus the $125 I am already paying ahead, it will be about 22 years to pay it off. This will be my second time refinancing and my monthly cost will be reduced by about $255 since I started my first mortgage. Crazy