Mortgage rates dropped some more today, now around 3.25%:
http://www.mortgagenewsdaily.com/consumer_rates/633676.aspx
Over the weekend, I spoke with a client who purchased his home five years ago, and has a 4.0% mortgage rate now on a loan amount of $315,000. If he were to refinance, his savings would be roughly $200 per month.
Is it worth it?
It might be worth it if he took out some extra money to buy another house!
Is it worth it to refinance just to lower your payment? If you found a $200 bill on the ground, you’d pick it up, right? If the extra $200 per month would change your lifestyle, then do it.
But I pointed out that he only has 25 years left on his existing loan, and that getting a new 30-year mortgage would add five years of payments if you kept the home for the duration.
The $200 per month savings times 25 years = $60,000 savings. But adding the extra five years means an extra $120,000 in payments (the new payment is about $2,000 per month).
What if you take the new loan and save the $200 per month for 25 years, and then pay off the balance? We looked it up on an amortization schedule, and the balance on the new loan after 25 years was $77,000.
Bankers always win – you may save the $200 per month, but if you kept the home for the duration, it will cost you more in the end.
You need to do a cash-out refinance and spend the money on something worthwhile (like another house!!!), or have the savings be enough to improve your lifestyle. The last survey showed that the average ownership is now 20 years, so don’t take for granted that you will ever sell this house – no matter how much I try to convince you! 😆
Run the amortization with him paying the extra $200 each month as an extra payment against the new mortgage. I think the loan is paid off in 24 years, instead of the current 25. The thing that usually blows it are the fees, you have to get a quote with a true “no cost” refi.
Agreed but I hate making those suggestions in case people forget to add the extra $$.
Jim, I got a 4.0% 30-year fixed when I bought my one-story (out-of-state) back in November, 2010. I doubted rates would ever be lower. I sold that house last April and bought another one-story in the next subdivision over (only 990 steps away!) and got a 3.625% 30-year fixed.
Seriously, I can’t believe rates are now 3.25%. I agree with “elbarcosr”–it’s the fees that kill you…
It seems like the lowest hanging fruit is just to see what the options are to refinance to the term left on your loan. So for example if you have 25 years left on your existing loan then ask the brokers the best they can do on a 25 year fixed loan with no fees/points. This way it’s pretty simple in the sense that if the monthly payment is lower than your existing loan then you’ll definitely come out ahead.
I’m not saying this is the approach to take all the time but it’s probably the easiest to “digest” for most people.
If you have 25 years to go on your current mortgage, refi into a shorter term, 20 or even 15 years, and keep close to the same payment. Even if you don’t hold to full maturity, you’ll build equity faster (e.g. banker loses 😉
Working on a refi right now. Saving about $130 monthly + I’m fairly certain rates will continue to go down through the election season.
Thanks for the post Jim! No new houses…wifey doesn’t have the dancing shoes for it. I could see the additional pay down each month and then being done a year early. However if you mess it up at any point over the next 24 years, could blow up. The fees in this case were $3k. They could do no cost but you lose some a tenth of a point I think which ends up costing $7k. Thanks for the help Jimbo!
Hi Jim!!!
Thank you for this post; what you outline is an important exercise, and one I don’t think many do when considering a refi.
But what I did NOT think of was a cash out to buy more property. Here I am, trying to shore up $200k cash (not an easy exercise given we have 3 college educations ahead of us) to get that second property.
I had recently been thinking of moving to a 15 year on our primary home – maybe that would get us to financial freedom faster. Of course, the vacation budget will take a hit for a solid decade! I’m just so tempted to do something to take advantage of these interest rates.
I will have to see your exercise through here and run numbers on a $200k cash out, assuming 3-4% appreciation on the 2nd home, and rental income… And see if it makes sense.
Thank you for the tip!
@ BAM I may be completely wrong but if you have a 30-year fixed on your primary home, why can’t you just “pretend” you have a 15-year fixed and throw those payments at the loan every month? Then you wouldn’t waste money on the usual refi fees, and financial freedom would come faster.
I may be totally confused by what you’re explaining, but just my 2 cents. Be well…
Thanks, @Susie! Valid point, thank you for sharing; I would refi to a 15 year to capture the extra 3/4% discount on 15-year vs 30.
This is what I love about bubbleinfo. Not just Jim’s expertise, but the comments from others. Thanks, BAM! And what’s the interest rate on a 15-year fixed these days?
15-year should be around 2.875% and no pts.
Even with the lower rate, the 15-year payment is 55% higher than the 30-year payment (@ 3.375%).
Jim, thanks for running the numbers for me, lol! That turned out to be a quick exercise (although I’m at 3.75 vs 3.375).
That 2nd property purchase has been eluding me since 2008. argh.
Cash out as much as you can, and we’ll sell the old house later!