Author Topic: Refi if moving in a year?  (Read 567 times)

TooMuchGlass

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Refi if moving in a year?
« on: September 08, 2019, 07:56:21 AM »
Hey all, we bought a house for 122k 18 months ago. Our rate is 4.625%. Rates have dropped, and we can refi to 3.25% for about $1100. Our loan balance is 88k (20% down, plus paying an extra $500 toward principle every month).

So, does it make sense to refi? Obviously, if we ended up not moving, it'd be a great idea. And I know that there are some situations where a buyer can take over your existing loan, which might be good if rates rise again, but I don't know too much about that.

I guess what I'm really asking is how does one find the "break-even" or the dollar amount where it goes from "not worth it" to "worth it." I'm having trouble narrowing in on what metric one would use to make that decision.

Thanks.

RWD

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Re: Refi if moving in a year?
« Reply #1 on: September 08, 2019, 08:12:18 AM »
The break even point is where the amount you've saved in interest surpasses the cost of the refinance. This is pretty easy to put into a spreadsheet.

You didn't provide all the necessary details for me to do the calculation for you but I estimate the break even point for this refinance is 12 months.

TooMuchGlass

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Re: Refi if moving in a year?
« Reply #2 on: September 08, 2019, 08:44:53 AM »
Ok, RWD, thanks!
You didn't provide all the necessary details for me to do the calculation

What other variables are needed? Start of loan date and original loan amount?

I'm not asking because I'm interested in you doing it for me, but because I want to learn and be able to do it myself.

RWD

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Re: Refi if moving in a year?
« Reply #3 on: September 08, 2019, 10:39:34 AM »
The missing information is your current payment (principal and interest only), the payment of the new loan, and whether the $1100 cost is rolled into the new loan or paid up front. If you want to get extra fancy you can also try to calculate the opportunity cost difference between the payments and refinance cost (if applicable).

TooMuchGlass

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Re: Refi if moving in a year?
« Reply #4 on: September 08, 2019, 11:55:51 AM »
If you want to get extra fancy you can also try to calculate the opportunity cost difference between the payments and refinance cost (if applicable).

I'll look up how to get extra fancy. In the meantime, here's what I got:

I'm using the basic loan calculator from Excel. It isn't exact, but it's close (I'm saying this because it says I should owe $88000, and I owe $88,300 right now).

On our most recent payment, we paid $657 principle ($490 of which is the extra payment we make, so $167) and $343 interest. It moves a couple dollars a month toward principle. Assuming we sell the house in June and that June is the last house payment we make, if we

1. change nothing, we'll pay $6050 in principle, $2956 in interest
(Payment: $1000 June balance: 82.3k)
2. stop paying extra, keep our loan, we'll pay $1640 in principle, $2956 in interest
(Payment: $511 June balance: 86.7k)
3. refi for exactly $1100 to 3.25% with a balance of 88.3k, and roll it into the loan for a total of 89.4k and don't pay extra on the principle: $1333 in principle, $2160 in interest
(Payment: $389 June balance: 88,063)
4. refi for $1100 to 3.25% with a balance of 88.3k, pay $1100 upfront, $1320 principle, $2138 interest
(Payment: $384 June balance: 87k)

Soooo. .  . by going from 2 to 3, we lower our monthly payment by $122, which we are able to save 10/1 to 6/1, for a total of $1,098. We'll have a loan balance that is $1363 higher than we would have if we had just switched to plan 2 (we're currently doing 1). So it'd end up being $165 more expensive to refi than to do plan 2, not accounting for what that $122 could do for us in VTSAX over those 9 months, which I do not know how to figure.

By going from 2 to 4, we free up ~$1150 in payments, but we have to pay $1100 upfront. This one doesn't seem to be desirable to us at all based on my math.

All that said, is there a compelling reason to stop doing plan 1 and do something else?

talltexan

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Re: Refi if moving in a year?
« Reply #5 on: September 12, 2019, 08:38:58 AM »
Can you get the 3.25% rate with a 30-year term? I wonder how much lower you could do with a 15-year term or a 5/1 ARM?

If you're willing to pay extra, the 5/1 arm may be worthwhile because--when the rate finally resets--you'll have paid down the principal a lot more to where the risk isn't as bad.

sparkytheop

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Re: Refi if moving in a year?
« Reply #6 on: September 13, 2019, 09:14:29 AM »

And I know that there are some situations where a buyer can take over your existing loan, which might be good if rates rise again, but I don't know too much about that.



Just posting to comment on this part.  Don't do it!  In most cases (read the fine print), someone assuming your load still leaves you on the hook if they fail to make payments.  It's like co-signing on a loan for a stranger, would you really want to do that? 

There are some situations where it is allowed, but that's not usually the case, and almost definitely not a good idea even if it is allowed.