Wait to Refinance

[malacca]

Rates are still dropping. Long ago we predicted 2.4% for 30 year fixed single family.

15 year is now under 2% and should go to 1.7%.

I only have one note and will refi to a 15 at 1.7% when available.

[honeyfill]

I think you are right.  I'm waiting at least a couple of weeks.  Worst cast they stay flat.

[ditheca]

Where are you seeing those rates? I can't find 15 year for under 2.5 anywhere in my area.

[Dicey]

Where are you seeing those rates? I can't find 15 year for under 2.5 anywhere in my area.

The OP may not be living in the US, based on their profile.

[clarkfan1979]

I'm waiting another 2-3 months before I re-fi. When the Fed announces interest rates at zero in March, rates were around 3.25%, but the demand drove them up to 3.75%. With rates at zero, banks were making a huge spread at 3.75%.

Instead of trying to be quick to get 3.25%, I'm playing it slow to get 2.75% for a re-fi on a primary residence. I will hopefully get 3.25%-3.5% on my rentals.

[ctuser1]

Someone in MMM gave me a nice rule of thumb a couple of months ago when I was really itching to refi.

Refi when the closing costs < 1 Yr of savings on the interest portion of the mortgage.

I like this rule. It provides a nice balance between only looking for no-cost mortgages and paying thousands in points.

I have an APY of 3.25% on my 15Y mortgage. So far, interest rate savings and closing costs combination has not crossed this rule of thumb. So I am still planning to wait. Perhaps another few months till the refi-glut clears??

[Dicey]

Someone in MMM gave me a nice rule of thumb a couple of months ago when I was really itching to refi.

Refi when the closing costs < 1 Yr of savings on the interest portion of the mortgage.

I like this rule. It provides a nice balance between only looking for no-cost mortgages and paying thousands in points.

I have an APY of 3.25% on my 15Y mortgage. So far, interest rate savings and closing costs combination has not crossed this rule of thumb. So I am still planning to wait. Perhaps another few months till the refi-glut clears??

It depends on how long you're planning to keep the mortgage. The longer your time horizon, the more flexible that rule of thumb can be. If you're in it for the long haul, an even longer payback period can still make sense.

[ctuser1]

Someone in MMM gave me a nice rule of thumb a couple of months ago when I was really itching to refi.

Refi when the closing costs < 1 Yr of savings on the interest portion of the mortgage.

I like this rule. It provides a nice balance between only looking for no-cost mortgages and paying thousands in points.

I have an APY of 3.25% on my 15Y mortgage. So far, interest rate savings and closing costs combination has not crossed this rule of thumb. So I am still planning to wait. Perhaps another few months till the refi-glut clears??

It depends on how long you're planning to keep the mortgage. The longer your time horizon, the more flexible that rule of thumb can be. If you're in it for the long haul, an even longer payback period can still make sense.

My problem is that I may want to refi again if the rates keep falling. The option of doing that gets more expensive the higher closing costs I pay. :-(... Hence I was thinking that the rule should be limited to < 1Yr, and preferrably < 6M if possible.

In the other extreme, let's assume we are sure we won't refi or prepay. Then you could just compare the APR (and not APY) that the lenders are required to report in loan documentation, with your prevailing APY. When I do that, it generally strongly prefers paying down a lot of points. That comes at the cost of making any future refi or prepayment much more expensive.

Am I thinking it through correctly? Or do you think I may be missing something here?

[Montecarlo]

Someone in MMM gave me a nice rule of thumb a couple of months ago when I was really itching to refi.

Refi when the closing costs < 1 Yr of savings on the interest portion of the mortgage.

I like this rule. It provides a nice balance between only looking for no-cost mortgages and paying thousands in points.

I have an APY of 3.25% on my 15Y mortgage. So far, interest rate savings and closing costs combination has not crossed this rule of thumb. So I am still planning to wait. Perhaps another few months till the refi-glut clears??

The better way to calculate it is almost as simple.  Calculate the total interest savings over the life of the loan and divide by the closing costs.  Then take the nth root, where n is the life of the loan.  That's your CAGR.  Compare that with your other options for investing the closing costs.

I used this to compare paying points or no points on my new mortgage.  Came out to a 5.8% CAGR.  I say anytime you can guarantee a return of 5% of more, take it, but I'm relatively risk adverse.

[ctuser1]

Someone in MMM gave me a nice rule of thumb a couple of months ago when I was really itching to refi.

Refi when the closing costs < 1 Yr of savings on the interest portion of the mortgage.

I like this rule. It provides a nice balance between only looking for no-cost mortgages and paying thousands in points.

I have an APY of 3.25% on my 15Y mortgage. So far, interest rate savings and closing costs combination has not crossed this rule of thumb. So I am still planning to wait. Perhaps another few months till the refi-glut clears??

The better way to calculate it is almost as simple.  Calculate the total interest savings over the life of the loan and divide by the closing costs.  Then take the nth root, where n is the life of the loan.  That's your CAGR.  Compare that with your other options for investing the closing costs.

I used this to compare paying points or no points on my new mortgage.  Came out to a 5.8% CAGR.  I say anytime you can guarantee a return of 5% of more, take it, but I'm relatively risk adverse.

Wouldn't calculating CAGR this way be misleading because it assumes you will keep the loan for the entire length and won't refi out.

This is especially important when rates are expected to keep falling well into 2021, i.e. you do want to keep that option to refi-out in hand.

To really calculate the return, you have to assign a value to that option. It will be an American Style option (you can refi out at any point of time, not just at expiry) that you can't value using vanilla Black Scholes. If you think what kind of a derivative you have to model to value this - it gets scary complicated real fast. 

This is why I did not want to go the route of actual CAGR or other such financial pnl/return modeling. :-( .. Keeping the rule of thumb like "I get my break-even in 1 year, and I don't lose anything if I refi after that" keeps it much simpler.

[Montecarlo]

Wouldn't calculating CAGR this way be misleading because it assumes you will keep the loan for the entire length and won't refi out.

Maybe.  There could be a scenario where you do the math as I suggested and refi, then interest rates fall further but the math is no longer favorable.  You would have been better off if you waited.

Or, there could be a scenario where you do the math as I suggested and refi, then interest rates fall further but the math and the math is favorable again.  You refi twice, but not as efficient as waiting and refinancing one.  Again, you would have been better off if you waited.

However, without having a crystal ball on future rates, it's is a good an accurate way to compare two scenarios: keep current mortgage for life of loan, or refinance.

This is especially important when rates are expected to keep falling well into 2021, i.e. you do want to keep that option to refi-out in hand.

Isn't this the same thing as saying the bond market is inefficient and easily exploited?  I see no reason to think I or anyone else can reliably predict interest rate trends.