Should I Refi?

Question

Hey Everyone,
          
          Debating whether I should refi my primary residence again or not.  I am not looking to take money out or anything and the current payment is easily affordable for me, I just don't like paying more to the bank than I have to!  
          
          I was at 6.75% until Sept 09 when I refi'd down to 5.25%.  The new loan would be for around 161k.  I can now get 4% paying 0.5% origination and no discount points.  I am only planning to live in the home another 1-2 yrs, but I'm underwater (va loan so refi still possible) so I plan to rent it out when I move.  It's not good as a rental, will go for ~1050/month so I'm thinking with this refi it would be $100 less I need to come out of pocket for each month.  
          
          Sorry for the long post, advice is appreciated!
          
          Lance

Bryan Hancock · Answer

Jason's answer is a good back-of-the-envelope calculation.  You can model the precise results using The Mortgage Professor's tool here:

Refinancing One FRM Into Another FRM

The decision depends a lot on your time horizon, but you will likely benefit in about a year.  Taxes, loan amortization, payment deltas, how hard your money works for you, closing costs, etc. all make a difference.  I am guessing you will benefit by refinancing in about 1.5 years.

J Scott · Answer

You'll end up paying about $2K in closing costs on the new loan ($800 in origination, $1000 or so in title/attorney/registration fees, and then potentially an appraisal).

If you'll be saving $100/month, you recoup the $2K outlay in about 20 months.  Though given the time value of money (it's worth more today than tomorrow), it's probably closer to 24 months.

So, do you plan to live there for another 24 months?  If yes, do the refi.  If no, pass on the refi.

Just my $.02...

Account Closed · Answer

In addition to J's answer, if you are not paying the closing cost out of pocket, instead you will take a higher loan amount than what you originally owe to cover the extra cost... then you will be paying the interest on the closing cost part of the loan too.

Bryan Hancock · Answer

It depends on how the loan is set up and what the lender will finance.  When we have refinanced recently we had enough equity in our properties not to have to keep from having to shell out money at closing.

I generally use a 3-year payback to decide whether or not to make capital outlays or to deploy cash in new mortgage projects.  If it takes longer than 3 years to get paid back my money is more efficiently used elsewhere.

I have heard about others using a 1% drop in rate rule of thumb too.  You donâ€™t have to use guessing game if you use the calculator above.  It will tell you everything pretty precisely.

Should I Refi?

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