Refinancing your home

Discussion in 'The OT' started by Mark Holtz, Sep 8, 2019.

Is refinancing your home an option in the future

Poll closed Sunday at 2:19 PM.
  1. I'm a renter, not a home owner.

    0 vote(s)
    0.0%
  2. Refinancing is not on my radar.

    2 vote(s)
    14.3%
  3. Refinancing my home is under

    0 vote(s)
    0.0%
  4. I've already refinanced my home.

    4 vote(s)
    28.6%
  5. No mortgage--my home is paid off.

    8 vote(s)
    57.1%
  1. Mark Holtz

    Mark Holtz Day Sleeper

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    So, lets do some math.... for comparison reasons, I'm using the current rates from Freddie Mac...

    Mortgage_Rates_Drop_-_Freddie_Mac_-_Google_Chrome 2019-09-09 21-10-45.png

    At this point in time, the ARM rate is higher than the 15 FRM rate. From January 18, 2018 to January 24, 2019, it was the ARM rate that was lower than the 15 year FRM. It switches back and forth.

    Now, using those numbers, lets compare a 15 year verses 30 year mortgage using the same base amount of $200k (it's a nice round number)...

    Mortgage_Calculator__Amortization_Calc_-_Google_C 2019-09-09 21-16-35.png

    Mortgage_Calculator__Amortization_Calc_-_Google_C 2019-09-09 21-17-39.png

    So, assuming you just do the payments without adding more to pay off the principal, you are paying $484.19 more per month (not double because of the interest rate discount), but in the end, pay $74,301 less in total interest payments.

    As for our ARM friend...
    Adjustable-rate_mortgage_calculator_-_ARM_loan_cal 2019-09-09 21-30-22.png

    The big thing is that you have to be able to afford the mortgage payment. There are people who purchase a home and forget about the other expenses of owning a home, and get into trouble. Each person's situation is different. While I realize that there are investment opportunities that are available, I also want to get my mortgage down. In case of emergency, I can spend the $250-5300 to recast my mortgage and get lower payments.
     
  2. codespy

    codespy Sorry Bears Fans! DBSTalk Club

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    I refinanced a $280,000 note in November of 2012 at 3.25% on a 30 year, with no points. No complaints. It was a better deal than getting STMax for free! :)
     
  3. SledgeHammer

    SledgeHammer Icon

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    Lovely, but you're making a bunch of assumptions and leaps that just aren't valid:

    * The 5/1 ARM is 30 yr amortization and you're comparing it to a 15 yr amortization
    * Points are slightly different
    * Those aren't real rates, they are averages
    * They are from a week ago

    Here are actual refi rates from Zillow:

    Lowest 30 yr fixed = 3.5% with $512 lender fees
    Lowest 15 yr fixed = 3.125% with $638 lender fees
    Lowest 5/1 arm = 2.89% with $575 lender fees

    Yes, you'll come out ahead on a 15 yr if you pay as indicated "in theory", but you'll only save $50k, not $70k and the mtg is $830 vs. $1400.

    Why wouldn't you take the 5/1 ARM (or any 30 yr for that matter) and pay the $1400 you would have paid on the 15? Same thing monthly wise, except then *I'm* the one saving $54K over you and I pay off my house before you do.

    See, the extra money you're paying is required and goes towards interest... my way, all the extra money goes to principal only :D.

    If you're willing to pay $1400/mo one way, surely you'd be willing to pay $1400 another way, right? If it would save you $54k?
     
  4. James Long

    James Long Ready for Uplink! Staff Member Super Moderator DBSTalk Club

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    Actually, he compared all three loans (the 30 year fixed is at the top of his post).

    That is the best way of making any loan (regardless of rate) better. Pay it off. (Provided you don't get a loan with a prepayment penalty.)

    Are you assuming that the ARM rate will never exceed the fixed rate? How does that $54K hold up if interest rates go up a quarter each year after the fifth year?
     
  5. Mark Holtz

    Mark Holtz Day Sleeper

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    I've compared a 30 year FRM, 15 year FRM, and a 5/1 ARM. My main point was to compare the payments and interest paid between a 30 year FRM and a 15 year FRM on a $200k hypothetical mortgage (mine is much less). ARM is a bit harder to estimate because the interest rate becomes variable after 5 years. Also, there were no closing costs/points included. I did cite my source (Freddie Mac) as the source of the interest rate.

    That's because in this instance, the difference between 30 year FRM and a 15 year FRM is .375%, not .5% in my example. The lowest interest rates may be offset by points which are part of the upfront costs.

    It depends on what you can afford and what you are comfortable with. From my perspective, interest rates are cyclical, and we are at/near the bottom for interest rates. As I said before, adjustable rate mortgages tend to go tick...tick...tick, and probably will go up. It's so hard to determine five years in the future. From my perspective, a 15 year fixed locked in at a damn good 3.25% rate makes sense for me. Because I plan on making extra payments and payments beyond what is required on my loan, my loan term will be shorter than 15 years and the interest paid will be less.

    From your viewpoint, an adjustable is better than a fixed based upon your circumstances.

    Who's right? Beats me. It may be both of us.
     
  6. SledgeHammer

    SledgeHammer Icon

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    Point was that if paying off your house and saving interest is your goal, you should have taken a 30 yr fixed and overpaid at the 15 yr fixed monthly and you'd be far, far ahead vs taking the 15. In fact, you SHOULD have taken a 40 yr fixed or even interest only and paid the 15 yr fixed monthly. Assuming no pre-payment penalty, of course :D. Gotta love amortization, huh? :D.

    Then again 3.x% on a mortgage is pretty much "no interest" when you can get 3% - 5% in a checking account and triple digits in the stock market.
     
    Last edited: Sep 10, 2019
  7. James Long

    James Long Ready for Uplink! Staff Member Super Moderator DBSTalk Club

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    If one is going to pay early then go for the lowest rate loan. Pay biweekly instead of monthly (if allowed and your income fits that pattern). Interest only or 30yr are better for a person who is unsure of their income and wants a lower required payment to be available.

    The ARM rates are close enough to the 15yr that if you need more than the fixed period (3/5/7/10) it becomes a matter of opinion. Will rates go up in five years? Maybe.
     
  8. SledgeHammer

    SledgeHammer Icon

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    I'm not suggesting taking a 40 yr or interest only for "financially irresponsible" people or even for "financially responsible" people "straight up" :). I suggested taking advantage of amortization and using those to overpay.

    If someone is comfortable paying $1400 a month for example, it would be in their advantage to take a 40 or IO loan and overpay the $1400 rather then take a 15 yr where $1400 is the minimum required payment. But that's assuming the person commits to overpaying the $1400 every month "as if it was required". If someone is going to take the 40 or IO for the lower payment and not commit straight up to overpay, then that wouldn't be too smart.

    I've been on ARMs for 15 yrs and never had one go up, had one go down.

    5yrs from now? Depends on the trade war and politics and economy. Not going to be substantially higher I don't think as the fed usually over tightens.
     
  9. James Long

    James Long Ready for Uplink! Staff Member Super Moderator DBSTalk Club

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    Plural? How many?
     
  10. SledgeHammer

    SledgeHammer Icon

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    Probably 2 or 3. When I first bought my house in 2002, I did a 80-10-10 and the goal was to get to 80% LTV as fast as humanly possible and refi. I think that took 2 - 3 yrs or something. Maybe quicker since I bought early on in the housing bubble and the house kept going up every week. It went up over $50K - 70k in the 6 or 7 months it took them to build it. I've been on ARMs ever since I got to 80% LTV.

    In case you're wondering what the point of the 80-10-10 was, it was to get around PMI. That's akin to an RSN and WHDVR fee in my book lol.

    I don't stay on an ARM too long once the lock expires. That's what's cool about my current ARM, for $295, I can relock it at any time.

    Don't think the refi costs eat up my savings :D, they don't. I never do points and generally get low cost refis. The refi I'm on now was $295 out the door and as said above, $295 out the door on a relock. Except with a relock you don't have to go through the whole process of getting a refi with appraisals and such. $295 on a CC, boom. Done. Relocked for 5 yrs. I don't have to wait for the 5 yrs to be up, I can relock at any time however many times I want.
     
  11. Mark Holtz

    Mark Holtz Day Sleeper

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    Lets see here.... if I take out a 30 year FRM for $200k at 3.49% mortgage rate, and apply an additional $484.19 per month, what do I get?

    Extra_Mortgage_Payment_Calculator_-_Accelerated_Ho 2019-09-10 19-25-24.png

    So, it will take nine months longer than a standard 15 year mortgage. You will be paying $11,395 in additional interest over the life of the loan.
     
  12. SledgeHammer

    SledgeHammer Icon

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    Ok, my bad, it doesn't work out with those numbers :(. Faulty assumption based on overpaying on my ARMs, although your numbers are slightly off and its more like 9k when you plug in actual numbers and not averages. How does it work out if the person has paid... say... 2.75% - 2.90% for the past 15 yrs? I ask because in my 15 yrs of 5/1 ARMs, I've never had a rate > 3%.
     
    Last edited: Sep 10, 2019
  13. jimmie57

    jimmie57 Hall Of Fame

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    2 other things that could be in play
    Interest on your home is deductible and depending on how much you make it saves you on taxes to pay more in interest. Also, If you shop around you can get 2.5% interest on some special savings plans so you would make money off the extra on your payment that you did not make.

    One thing I was always told is that it easier to sell a house if you don't have much invested in it.

    Having said the above, I did what you wrote and paid extra every month and paid my 30 year loan off 8 years early.
    Not having a house payment makes you feel like you just got rich.
     
    SledgeHammer likes this.
  14. codespy

    codespy Sorry Bears Fans! DBSTalk Club

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    My note will not allow me to pay bi-weekly. :(
     
  15. SledgeHammer

    SledgeHammer Icon

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    Right now I have a checking account that pays 3%, but I'm looking at one that pays 4%. I was going to wait til I found a new job rather then switch my current direct deposit, but that's taking a bit longer then expected with the economy and all :(.

    You're spot on with the tax deduction, but that's no longer as beneficial as it used to be with the low SALT cap.

    If you pay off your mortgage, you can consider that money "gone" until you sell your house or take a LOC, etc. on it. It doesn't work for you.

    Is it better to pay off a sub 3% loan and make 0% on that money because its "gone", or hold the 3% loan open and make 3% on a checking account + > 100% return in the stock market? I've certainly made more in the market this year alone vs. the entire interest savings no matter what approach you use. Last 2 - 3 yrs have been amazing.
     
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  16. SledgeHammer

    SledgeHammer Icon

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    Wow, I don't think I've ever seen a loan or heard of one with a pre-payment penalty. Maybe California doesn't allow it or something?

    EDIT: I guess the law in CA says they can't charge a pre-payment penalty unless you pre-pay > 20% in a 12 month period. Seems like a good way to drive away business, so I guess most places don't do it here.
     
  17. James Long

    James Long Ready for Uplink! Staff Member Super Moderator DBSTalk Club

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    You are the perfect candidate for an ARM.

    The deduction should give you some of your interest back by reducing the amount of income taxed, but I'd be surprised if the difference in taxes due was changed by more than a fraction of the extra interest paid. (One would be paying more in interest than the tax credit.)

    The "if allowed" for bi-weekly payments (and pre-payment penalties) has been mentioned in this very thread. :)

    Indiana law prohibits penalties for pre-paying loans "in full" EXCEPT when land is involved. If land is involved the lender can charge up to 2% of the final 60 days of payment, unless the loan is paid off by an insurance benefit or the loan is more than three years old or the loan is refinanced with the same lender. The law is worded "in full" and would not apply to payments that are not in full. That leaves it it the competitive marketplace to decide if fees could be charged for pre-payment - or if biweekly payments are allowed.
     
  18. Mark Holtz

    Mark Holtz Day Sleeper

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    I've been using the online loan calculators at Amortization Schedule Calculator and Extra Mortgage Payment Calculator - Accelerated Home Loan Payoff Goal to calculate the cost of the mortgage. The main reason why I'm using Freddie Mac's numbers isn't because it's the lowest, it's an average. It is also a good source of 2-3 decades of historical data.

    The choice between whether to use a FRM vs a ARM is ultimately a personal one, and a decision you are comfortable with.

    Whatever works best for you and whatever your desires are. There are sound financial principals behind your investment strategy. I'm just more passive than aggressive.

    I'm about 20 years from retirement, so my financial goals are, in this order, max out my 401(k) including catchup, and being able to retire without a mortgage. Because of the gains in the last 2-3 years, I was able to cash out a stock that I had with my employer near it's peak (before a major drop in it's price) and apply a big chunk of those gains towards my principal, a small chunk to Uncle Sam for capital gains taxes, and still have money left over for some home improvements. Beyond my mortgage, I have no long-term debts. Short time, yeah, I have credit card debt because all of my monthly bills gets charged to my credit card, but that card is paid off every month, and earns me some rewards.
     
  19. jimmie57

    jimmie57 Hall Of Fame

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    I don't think the following is correct.
    "See, the extra money you're paying is required and goes towards interest... my way, all the extra money goes to principal only :D.

    If you're willing to pay $1400/mo one way, surely you'd be willing to pay $1400 another way, right? If it would save you $54k?
    "

    The more you (using either method, yours or his) that you pay each month the faster the principle comes down and the subsequent payment is less interest and more principal. That is because all loans on homes and cars in Texas are simple interest loans.
    The very first payment is the largest amount of interest that you pay and the interest would be the same no matter which method you chose. $200,000 * .0325 / 12 = $541.66 interest. Any over that is going towards principle. The next payment would be on a principle of $199,141.66 and the interest would drop to $539.34 for payment number 2, assuming that your first payment was $1,400 ,etc.

    Having written this, these numbers are not prezactly right, just round numbers to use for comparison.

    However, I do favor going with the 30 year loan and sending in the extra every month. This gives you the option that if you had an unexpected financial obligation pop up that you could use that extra that you were sending to pay for it and make it up may in the next few payments.
     
    Rich likes this.
  20. SledgeHammer

    SledgeHammer Icon

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    Overpayments go to principal only. Yes, over time, the percentage of your normal payment shifts from more interest to more principal. Overpaying helps accelerate that process.
     
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