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I've been entertaining the thought of refinancing given that mortgage rates are so low right now.
We closed on our 2/2 1,050 sq ft condo in late 2014. I bought it for 145k.
I put 25% down and have a fixed rate of 4.25%. My current payoff amount is around $72,000.
My credit is phenomenal (low 800s) and I've been making additional payments of $300-$500 toward the principal.
Would it not be prudent for me to refinance now?
I feel it may not make sense to still have a rate of 4.25% when I might be able to bring it down to something in the 2-3% range. I've also been getting Refi offers from Chase saying I wouldn't have to pay anything in closing costs.
I'm thinking of perhaps going from a 30- to a 15-year mortgage. Heck, if I make extra payments as it is, having a higher monthly payment won't sting all that much.
I'm not sure how long we plan to keep the unit, or whether we would rent it out if we were to buy a new home down the road.
I would imagine we will stay here at least another 3-5 years. We're trying to start a family but the goal is to be one and done, so a 2/2 should suffice for now.
Thoughts? Should I believe banks like Chase when they say I'd pay zero closing costs if I refinance with them, or are those costs furtively rolled into the interest rate/principal?
I have a townhouse that I use as a rental i bought back in 2008 with a 30 yr interest rate at 5.375%. I just refinanced it to a 2.56% and saved over $1K per month in mortgage payments.
Ask the details on the "no closing cost". It may simply mean to roll your closing cost into your loan so there's "no cash outlay" for you.
Re: 30 yr vs 15 yr loan. You will need to decide what is your plan for the condo? Is it paying off debt or lower monthly payments? In my case, if I were to choose a 15 yr loan, the monthly payment would be the same and I'd just pay it off in 15 instead of 30 yrs. But I wanted to lower the monthly payment. Also from my spreadsheet, I found if I make extra payments, I can pay it off in 15 yrs. In light of the economic uncertainty, I did not want to be forced to pay a higher monthly payments but will do so in my own choosing.
Another consideration in 15 vs 30. A 15 yr loan basically will give you a higher capital gains when you sell because the loan is paid off. But my townhouse has been enjoying good appreciation at a rate faster than I can payoff my loan, so the higher monthly payments on a 15 yr mortgage just so I can enjoy a higher capital gains becomes a less of a compelling argument.
In the future, if you can afford to buy another home without the need to sell the condo, I would encourage you to do so. It's a part of building wealth. Your rental income from the unit are TAX FREE to you by writing off against the depreciation of the condo. Over time, it will appreciate and give you additional purchasing power.
Let's look at the figures. You financed 108,750 at 4.5%. Your average monthly P+I is about 850 to get you down to 72K after 6 years. Interest paid about 22,000 to 23,000 to date. Continuing the same payments results in about 36,000 total interest over the life of the loan (13,000 to 14,000 left). Loan is paid off in about 8 more years.
Refi 72,000 at 2.5% on a 30 year loan and continue to pay about 850 P+I and the new loan is paid off also in about 8 years. Total interest is about 7,200.
Doesn't really matter if you take a 15 or a 30 year loan. With the extra month payment you'll still pay it off in 8 years.
The advantage of a refi at this point is the interest savings over the next 8 years.
You can use this loan calculator to refine the figures.
As for no closing costs, pin the banker down with this question: "Are there really no closing costs or are you rolling the closing costs into the loan so I'm not coming up with cash for closing?"
Ask for a good faith estimate in the form of a HUD-1 closing statement.
I guarantee there are closing costs. They are usually just rolled in with the refinance. They aren't working for free and you have to pay more in closing costs to get a lower interest rate. We just refinanced ourselves.
They can easily crunch the numbers and tell you if it's worth it. It's a balance of how long will it take for the savings in interest to catch up to your closing costs. There are other factors such as the amortization schedule and definitely how long you plan to be in the house.
We refinanced from 3.75 to 2.75% and it will take around 6 years to break even with the closing costs. We could have gone down to 2.5%, but it would have taken something like 17 years to break even. Have a reliable mortgage consultant run the numbers for you and send them back to you. Then get their honest opinion whether they think it's worth it or not and why based off the numbers they sent you.
When you say you might be selling in 3-5 years, then that would definitely affect the decision. You can still lower it a certain amount, say down to 3% and have very low closing costs where it would be worth it even over the short term. Call someone, have them crunch the numbers for you and explain it all to you, that's their job.
Thanks for your response. See replies/comments below.
Re: 30 yr vs 15 yr loan. You will need to decide what is your plan for the condo? Is it paying off debt or lower monthly payments?
It's the former. I want to pay it off ASAP so I can then look into buying another property. I'd rather have to worry about only one mortgage at a time.
In the future, if you can afford to buy another home without the need to sell the condo, I would encourage you to do so.
That's the plan, but I want to pay off the condo first so that all I would have to worry about are HOA fees, insurance, and property taxes.
A few newbie questions on closing costs which is $4400 + cash to close $500 on the one I inquired 2 days ago. Is it high?
It's rolled into monthly payment. Is it included as part of the principle balance? When you refinance, you pay off the closing costs left with the existing mortgage when transferring to the new loan company. Is that correct? If so basically, you would add $4 to 5K to what you owe every time you refinance. Does it make sense to refinance if my current rate is 3.75% and the new one is 2.125% and my amount is 91K.
I'm also not sure how the interest rate works. I just looked at what I paid to principle and what paid to interest and it appears 18% of monthly payment went to interest. Is there a site to show the formula on how payment and interest rate is calculated?
Thanks for your response. See replies/comments below.
Re: 30 yr vs 15 yr loan. You will need to decide what is your plan for the condo? Is it paying off debt or lower monthly payments?
It's the former. I want to pay it off ASAP so I can then look into buying another property. I'd rather have to worry about only one mortgage at a time.
In the future, if you can afford to buy another home without the need to sell the condo, I would encourage you to do so.
That's the plan, but I want to pay off the condo first so that all I would have to worry about are HOA fees, insurance, and property taxes.
Wordsmith12:
I'm a mortgage broker but I only do loans in Florida.
However, it sounds like you want to keep this property which (if you like it) is a good idea, rent it out but have the lowest payment so when you rent it, you can make some money on it.
There are always closing costs - the higher the rate, the more lender credit there is. If you buy the rate down, you will pay points but sometimes worth it.
People ask me what I would do all the time. I am hoping to my 30 year loan (now 27 years left) into a 15 year loan at 1.875%. Yes, I may be buying down the rate but this will MAKE me pay it off sooner.
We also plan to be in the home long term and would like to buy a 2nd home somewhere (which is the reason I joined CD back in 2007!! - but I was young then!)
I'm also not sure how the interest rate works. I just looked at what I paid to principle and what paid to interest and it appears 18% of monthly payment went to interest. Is there a site to show the formula on how payment and interest rate is calculated?
Use the amortization calculator for that too.
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From a mortgage broker in Florida
