Should we refinance this property?

Question

We need some advice please! We are working with the lender who insists that refinancing the house that we're hacking, and in which we're going to stay for 30 more months, should be refinanced because he can get us more than a point reduction in interest rates.

Our current mortgage balance is $310,000. There are $13,000 in closing costs (which includes taxes, escrow, and insurance), plus we have to bring $700 to closing. Our current interest rate is 7.25% and the new interest rate would be 6.125%.

Refinancing this mortgage doesn't make sense to us. Are we running the numbers wrong or are we working with the wrong lender?

Thank you in advance for any advice or recommendations you can offer.

Dan H. · Answer

I show on just the rate at 7.25% if done today would have P&i of $2115 on 40 year term. Note your P&i is higher because the initial loan was higher than $310k balance. 6.125% is $1884.

you should use your current P&i instead of the $2115.

$2115 - $1884 =$231.00 (the actual number will be higher)

I am assuming you plan on selling in 30 months (not keeping it as a rental). 231 * 30 months is $6930. Is the non recurring closing costs less than this. If so, you should consider refinancing.

Good luck

Frankie Vozzi · Answer

Great question, Beth  you’re definitely right to pause and run the numbers before refinancing. A 1.125% rate drop sounds good, but depending on how long you plan to keep the property, the closing costs might outweigh the savings.

A quick way to check is to divide your total closing costs by your monthly savings  that gives you your break-even point. If that number is longer than the 30 months you plan to stay, it may not make sense to refinance right now.

Deborah Wodell · Answer

From what you’ve shared, it doesn’t really seem like refinancing makes sense for your situation. You’re only planning to stay in the house for 30 months, and with $13k in closing costs versus roughly $230 a month in savings, it would take well beyond your timeline to break even. A lot of the costs your lender is including, like escrow and taxes, aren’t really one-time expenses since you’d pay them anyway, so your actual payback period is even longer. It also seems like the lender’s fees are higher than what you should be seeing, so you could probably shop around if you wanted, but even then, the short-term hold still makes it a tough call. Personally, I’d probably pass and put that money toward the house or another investment instead.

Keyona Taylor · Answer

If you’re not planning to hold the property long-term, then refinancing isn’t worth it.

Kate Nixon Taylor · Answer

Hi Beth, What is your current monthly payment and the monthly payment you are being quoted? I would be happy to take a look at your numbers and give you more detailed feedback. Let's connect!

Cheers, Kate

Beth Smart · Answer

Hi Greg. Thanks for replying. The origination fee is $7380, appraisal and credit is $2,072, title and closing fee is $1345. That's over $10700. The lender had said that it shouldn't be more than $4,500 and none of these numbers is $4500, so I'm going to do a hard pass. Geez, learning and questioning is empowering!  Thanks again!

Jay Hurst · Answer

I do not know what your credit score or  loan to value is but assuming those are good then there should not be near that cost at 6.125%.  My point is the refi might not make sense at that rate, not sure because the credit and LTV will effect the cost, but willing to bet you can do MUCH better in costs elsewhere.

Frankie Vozzi · Answer

Hey Beth, Frankie here! Rate drops can definitely be a great opportunity  it just depends on your time horizon and break-even point. Sometimes there are even better ways to structure things so you can save more in the long run, I sent you a DM excited to connect!

Jay Hurst · Answer

The 1% lower rule of thumb BS is just, that BS. It is all about your payback period. Payback means when the savings of the refi (lower monthly payment) will pay back the one-time costs.  So, for a 75k loan this might require a 2.5% drop while on a 2 mm loan this might be a .250% drop-in rate.  So, the 1% means nothing.

the 13k number you gave upfront does count escrow numbers which are NOT a one-time expense. You will pay those expenses no matter if your refi or not, so they are not one-time costs and should NOT be figured into your payback calculation. I put together a payback worksheet for all refi candidates that lays everything out. (below) In theory if your payback is 9 months, and you expect to be in the house for more then 9 months it would make sense because you would be in the money for 21 months.

Greg Scott · Answer

Follow the money.  Your lender only gets paid when he gets you to execute the refi, so he is highly incentivized to convince you now is a good time to refi.

If the math says not to do it, I wouldn't do it.  However, I'm not sure you are doing the math correctly.  Taxes and insurance payments are escrowed, and sometimes the first month mortgage payment. Escrow is not a separate thing.  Also, you are going to have to pay taxes and insurance regardless what you do, so they should not be taken out of the calculation.  Actual closing costs should be about 2-3%.

Should we refinance this property?

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