Time to Refinance Mortgage?
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Mortgage rates have more correlation with 10 year bond yields which hit almost 5 year low in the last few weeks (although they did rebound some Friday and today). So Fed rate cut may not have that much of an effect.
I am currently on a 15/1 ARM at 4%, balance is 550k. I have been thinking about refinancing and have an offer for 3% on a 7/1 ARM. Refi cost is 3k. Putting the data into the spreadsheet from ENT Doc, it shows a NPV of 62k, assuming I pay off the balance on the 15/1 over 30 years, and pay off the ARM in 7 years. That seems like a hard no as far as whether or not to refi, but doesn’t take into account the variable rate on the current mortgage after the teaser rate expires. Possible of course that the rate could go down…
I just finished paying my student loans this month, and will have an extra 11k of monthly cash flow no longer directed to loans. I also receive quarterly bonuses totaling about 250k. My current monthly mortgage payment with taxes is 4k, with the refi would be about 8.5k.
Plan is to do the refi with the extra 4.5k coming out of the money previously directed at student loans. The other 6.5k previously directed at loans would go to taxable. The info on the spreadsheet has given me second thoughts. It’s just painful seeing how much money I currently spend in loan interest, about 1800 monthly.
In addition to 401k, BD Roth, HSA, I also make a 70k CBP contribution. I haven’t been making contributions to taxable since attacking student loans.
Yeah this spreadsheet doesn’t cover your situation very well. The variable interest really adds too much unknown. You could do a 15/1 to 15 year fixed to make the calculation easier and more accurate. That might be how I’d approach it – switching to a 30 year or 15 year fixed and what that would do, with or without extra payments. See which is superior and lands you in a positive NPV situation.
Hi ENT Doc and forum!
Thank you for sharing your refinance spreadsheet. Would you mind explaining to me what the After tax APY from marginal cash flows indicates on the spreadsheet. I took it to assume the returns you get from the increased cash flow invested in the market (delta between your old mortgage payment and your new one). However, I am clearly interpreting it wrong because as i decrease the APY, it increases my NPV. Your clarity is much appreciated!
See the PM I sent. In sum, you are correct – the APY is a compounded annualized growth rate (5% annualized aftertax return on your asset allocation). It is presumed that the marginal investment is your asset allocation in whatever account is your marginal account. The reason the NPV decreases for an increasing APY is because the cash flows are discounted at a higher rate, making future dollars worth less in today’s terms. Conversely, you can set this sort of thing up in future value terms, but future dollars 30 years from now are harder to understand – unless you are using aftertax, real growth rates. The real growth rates would involve adjusting for inflation.
Disregard my last post… I didnt appreciate the final column… the APY is your discount rate going forward. Thanks again!
Johanna, I want to look this over later at some point. Seems odd that $53,491.20 in cumulative negative cash flow in the last few years of the example would, with the initial 5k expense, be offset by $29k in positive cash flows. There are two changes in signs of cash flows so there should be two IRRs. I can’t get Excel to spit out the second one. Before disseminating to the masses let me double check the math and framing of the decision.
Click to expand…Appreciate the update – will await the final product. Thanks again.
Click to expand…Ok, so I made some slight modifications. I framed it not so much in a APY based decision but in NPV terms. What was happening in the prior spreadsheet (to be deleted and post edited to refer here instead) is that with certain numbers the IRR could never yield a NPV=0 and the APY was spitting out error terms. Interestingly, my initial concerns weren’t really problems – the discount rate just took the high future negative cash flows and reduced them so significantly in present value terms that the smaller but earlier positive cash flows more than offset them in PV terms.
This spreadsheet is easier to understand and won’t have the errors the previous one did (I hope). If the NPV is positive, refinance. If negative, don’t. But if you’re not going to refinance you better put that money for refinancing costs to work in that alternative investment. And if you’re going to refinance you better increase your monthly automatic investment.
Click to expand…Nice calculator. Thanks. Just refinanced. Bought near last years peak and just dropped my rate by 0.75%. Huzzah!
If youngish (long horizon to retirement) and low prob of changing house, do a 30yr at historic rates. It can be a great inflation hedge paying fixed debt off with inflated dollars.
30yr only exists because of feds, no commercial bank would take on that length of fixed interest.
It is also nice to ignore this thread when one has no mortgage!
Solo Internist, Midwest
I don’t have a mortgage to refinance, but I do wish there was a way to reduce my property taxes. Funny how they always seem to go up every year. I haven’t yet found any way to fix that!
I miss those days of serial refinancing when we could save every time we did it. My favorite mortgage loan was a 10/1 ARM at 2.6%, with an effective rate of 1.4% after tax deductions.
Just bought house in March 2019. Have paid 2 months so far (May and June). My rate was 3.75 for 7/1 (goal of paying off in 10 years or so).
Mortgage guy said it’s dropped to 3.375, and he is offering refi for 0.01% of remaining mortgage, no title/closing fees. So, that’s about $730 to lower the monthly payment by $168. Sounds like no brainer. Am I missing something here?
EDIT: it “may also require appraisal” which I assume means it “will also require appraisal”
Mortgage guy said it’s dropped to 3.375, and he is offering refi for 0.01% of remaining mortgage, no title/closing fees. So, that’s about $730 to lower the monthly payment by $168. Sounds like no brainer. Am I missing something here?Click to expand…You have a $7.3M house? I’m guessing it’s really a $730k house with a refinance fee of 0.1%. Either way, it sounds like a good idea if that’s the only fee.
“But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
― Benjamin Graham, The Intelligent InvestorMortgage guy said it’s dropped to 3.375, and he is offering refi for 0.01% of remaining mortgage, no title/closing fees. So, that’s about $730 to lower the monthly payment by $168. Sounds like no brainer. Am I missing something here?Click to expand…You have a $7.3M house? I’m guessing it’s really a $730k house with a refinance fee of 0.1%. Either way, it sounds like a good idea if that’s the only fee.
Click to expand…Hmm. You’re right. The email from him says “0.01%” but that can’t be right.
I just called the guy at the bank who I got my mortgage from and his phone is disconnected and they told me he is no longer employed here… I am waiting for his replacement to call me back.
I have a message out to another bank inquiring.
How many banks are reasonable to shop around too? 3?
“Never let your sense of morals prevent you from doing what is right.”