Refinancing - Worth It Right Now in Austin? (mortgages, credit)

[dave bacon]

I get this question a lot from my clients: Does refinancing makes sense if you have had your loan for a while and refinance into a new loan with a 30 year term?


The answer is yes, if you can lower your rate and pay little or no non recurring closing costs (we call that a "no cost" loan). Increasing your loan term is a non issue because you don’t have to pay your new loan off in 30 years, you can pay it off in 25 or 20 years, or whatever the heck time period you like. Here are the numbers:


Let’s say you got your original mortgage for $300,000 @ 5.5%, with a monthly payment of $1712, and you’ve had it for 10 years. Your balance now is $248,862 and you have 20 years (240 payments) remaining. If you refinance into a 30 year loan @ 4.5% @ no cost, your new payment is $1267, but instead of paying $1267 per month you continue to make your old payment of $1712. This pays your loan off in 17.66 years (instead of 20 years, which you would have had to pay with your old mortgage), saving you $47,936.


The real key is not paying closing costs: If you can lower your rate and pay little or no non-recurring closing costs, then you will almost always save money by refinancing.

[austin-steve]

Originally Posted by dave bacon

.. This pays your loan off in 17.66 years (instead of 20 years, which you would have had to pay with your old mortgage), saving you $47,936.

No, because you're including principle paydown in the $47,936. The principle paydown portion of a monthly mortgage payment is not money spent, as it goes straight into equity and net worth, so in the above example, $47,936 has not been "saved". You'd have to break out the interest only portion to determine the savings.

But nevertheless, I think it makes sense mathematically to refinance in a lot of different case study scenarios, but these math equations assume the average American Consumer to be a rational person of prudent financial disposition. The opposite is in fact true.

For example, in the above refi, instead of reinvesting the "saved" $445/mo, the typical American Consumer, thinking with "monthly payment" mentality, thinks they are now simply "$445/mo. richer" and they immediately look for a way to spend that extra discretionary monthly amount. Will they invest in index funds or college savings? No, they'll buy a a depreciating asset such as a new car, new furniture, or a new boat because now, in their mind, they can "afford" the $400/mo payment with the "extra" money they now have after the refi.

Along with the new boat comes the additional costs of owning and operating a boat, which far exceed remaining $45/mo left over from mortgage payment reduction. 5 years later when they finally try to get rid of the money pit called a boat, they are worse off then if they had never refinanced. I think this is the sort of thing my accountant was talking about when he says most people are better off leaving their loans alone.

Steve

[cBach]

Originally Posted by Trainwreck20

With property taxes and sales taxes deductible, though, you blow through that standard deduction pretty quick...on an expensive house (with high property taxes) you really do get to deduct all the interest costs.


That is a psychological factor, not a money factor. You sum up all the money you pay over the term (including refi fees), subtract the deductions (complicated math, maybe, but you can make a good estimate), and then possibly apply a Time Value of Money factor. Yes, there are a lot of things to consider, but from strictly a total dollars paid out standpoint, it is usually makes economic sense to refinance if you meet some criteria:
- you still owe a significant amount of principle;
- you plan on staying in the house long enough to cover refi costs (at a minimum);
- the interest rate difference is 'worth it'. 1 percent is mentioned above, but it needs to be calculated and can be wildly different.

You mention 'what if I move early?' That is a good point, but as long as you cover the refinance costs, then moving early makes the payoff date totally irrelevant. Adding years to a loan you will never pay off makes the monthly payments king. If you plan on staying until pay off, then the total costs trump.

On the flip side, I doubt most people invest what they save in monthly payments, so I did not include that in the math anywhere, although you can.

Also, there's one other factor that you're not considering:

Filling out the paperwork takes time and you're not considering the opportunity cost of that time, which would be the going rate for your job if you hired out yourself as a consultant. I can't tell you my rate but it's comparable to lawyers rates to give you an idea. It doesn't take long for that to add up quickly when searching for the best rate at the best bank. It simply is not a good use of my time. Not to mention, your credit rating takes a hit each time you fill out an application for a refi. Then there's the stress of it all and the fact that they sell your info so now you'll be getting all the offers from banks in the mail for the next 10 years asking to refinance even after you've done that.

[Trainwreck20]

Filling out the paperwork takes time and you're not considering the opportunity cost of that time, which would be the going rate for your job if you hired out yourself as a consultant. I can't tell you my rate but it's comparable to lawyers rates to give you an idea. It doesn't take long for that to add up quickly when searching for the best rate at the best bank. It simply is not a good use of my time.

I, too, am a 'billable hour' worker. I know my bill rate, but simply saying I should apply that rate to everything in the world is simply misleading. If I do that, I should not mow my lawn, clean my house, shop for my food, cook my own food, get my own mail, etc. (although some of those things I do pay for ). Using that 'lost earnings potential' only applies if you WOULD have been working instead of doing activity 'x'. Also, you only receive some fraction of what your bill rate is - you have to pay taxes, overhead, medical, etc., and rarely does the take home come out to more than 1/2, more likely between 1/4 and 1/3, of the bill rate.

Not to mention, your credit rating takes a hit each time you fill out an application for a refi.

I am not sure that is exactly true, I think it has been altered to indicate multiple applications, but in any case, we have never had trouble qualifying for the lowest rate advertised, so I am pretty sure that minor fluctuations in your credit score due to applications really do not matter, unless there are other issues there.

Then there's the stress of it all and the fact that they sell your info so now you'll be getting all the offers from banks in the mail for the next 10 years asking to refinance even after you've done that.

Heck, we just have a shredder next to the desk in the office. I would say that all that crap we get would barely notice the additional 'load'. I think I am actually looking forward to the USPS going bankrupt so there won't be cheap junk mail delivery anymore .

And, personally, I find it very relaxing to go through the process of saving 10s of thousands of dollars

I agree with Steve, though, that lowering your monthly payments just so you can spend it is not a good idea - I have refinanced twice in my life, and once was 30 yr to 30 yr notes, but I did pay in the extra money each month until I sold my house. The second time we went from 30 yr to 15 yr and the payment went up some, but the total cost and time to payoff went way down. Refinancing to have monthly cash flow is akin to taking out a home equity loan for toys.... OTOH, I do have a co-worker that I think refinanced to free up cash to pay for a kids college education, so I guess you can go that route....

[robino2001]

Originally Posted by 10scoachrick

Well said...it is certainly not all pure 'dollars paid per month'. Another 'psychological' approach would be to re-fi, continue to budget the same monthly amount to cover the lower payment and apply the difference toward early principle payments. A different sort of 'investment'. (Assuming you don't 'need' the saved monthly amount)

We're under two years into our 15-year mortgage, so it's not like we'd be adding a ton of time to the length of the loan. I can see that some folks would benefit from re-fi-ing a 30-year(say with 20 years to go) into a 15-year to get the lower rate, even though the monthly payment may actually go up(or not, depending on current rate). For some crazy reason, it just appeals to me to foresee a paid-off house while I'm still alive!

That is exactly what I've been saying in my head reading through this entire thread that I didn't see anyone mention as everyone kept talking about extending the length of the mortgage. We just refinanced our (now rental) property, shaved ~$400 a month off the payment AND went from 30 to 15 years, still paying what we'd always been paying and now our mortgage is set to be paid off much shorter because a much greater percentage of our payment is going to principle instead of interest/PMI. If you're thinking about refinancing and can shoulder the payment you're paying now, then refinance (assuming it's worth it closing cost/retention-wise) and keep the same payment going. The numbers can be amazing when you realize what happens.

[cBach]

[quote=Trainwreck20;21462466]I, too, am a 'billable hour' worker. I know my bill rate, but simply saying I should apply that rate to everything in the world is simply misleading. If I do that, I should not mow my lawn, clean my house, shop for my food, cook my own food, get my own mail, etc. (although some of those things I do pay for ). Using that 'lost earnings potential' only applies if you WOULD have been working instead of doing activity 'x'. Also, you only receive some fraction of what your bill rate is - you have to pay taxes, overhead, medical, etc., and rarely does the take home come out to more than 1/2, more likely between 1/4 and 1/3, of the bill rate.
[quote]

When are banks open? Yep, during business hours from 9 am to 3 pm. Guess what, that's when I could be "earning" money. So, that takes out from my billable hours.

From a financial standpoint, it makes more sense to hire out a lawn man, maid, etc... However, if you have joy or fun in mowing the lawn like I do, then it doesn't apply. I do, however, hire out a maid from time to time as I hate cleaning the house.

I, however, do not have fun filling out loan applications, but if you do, more power to you. So, for that activity I have to think about the impact to my income from having spent time on it.

[blakely]

Originally Posted by cBach

When are banks open? Yep, during business hours from 9 am to 3 pm. Guess what, that's when I could be "earning" money. So, that takes out from my billable hours.

We met with our mortgage refi rep at night, at our home, and finished all paperwork in less than an hour. Never traveled to a bank. It took nothing out of my billable time or work hours, there were no fees associated with the loan, and I can say with 100% confidence that we just saved ourselves a boatload of money.

You don't have to do it at a bank. We have a great rep who does everything with us at night or weekends.

[Trainwreck20]

Mine wasn't quite that easy....took about half an hour online during lunch, then a follow up fax or two, I think...it has been a while.

[Raskolnikov]

This has been a fascinating thread. Thanks everyone for posting - we've learned a lot. Okay, so what I'm hearing is a traditional refinance for 30 years would be in the low 4’s or, a no cost refinance around 4.6%. Anyone know what a no cost refi means? And do those rates sound decent?

[Trainwreck20]

'No cost' means they don't charge you any fees to refi, but you do pay a higher interest rates....i.e., you do pay, just not upfront.

Have to shop around to see if those are good rates....