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October 26, 2011


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You already answered your own question, the no closing cost option is a no-brainer.

In fact, if there are zero closing costs and nothing rolled into the loan, then going from 4.875% to 4.75% would also be a no-brainer.

The only question is if it's a better idea to go to 3.875% and pay the closing and origination. That would require estimates about how long you would stay and how long it would take to recoup the costs. If you don't have really firm answers about how long you will stay then do the no-brainer and take the 4.25%. It's still a crazy cheap interest rate.

You do realize that refi will reset the mortage pay off time. If you have a 30 year mortgage that you have paid two years on and refi you just reset the clock for another 30 years.

$125 a month is good enough reason to refi but what will you do with the extra $125? That is a better question ask yourself.

When I refi I went from a 30 to a 15.

Be careful about getting the details on the exact closing costs. They say that 'most' closing costs are covered, so you could still be looking at hundreds or more that isn't covered. Also make sure they aren't increasing hte principal at all. You can get free closing but sometimes the banks or mortgage brokers can be sneaky and slip in costs at the end or say theres no costs but hten just add it to principal. Usually that doesn't happen but it can. Still its probably worth a refinance for you. You'd be saving nearly $2000 in interest annually.

Also you need to make sure you'll be staying in the home for a few years. If theres much chance you'll move in short term then a refi. can be a waste of money.

In general you need to figure the interst savings vs the closing costs and then determine how long it takes you to recoup your closing costs via interest cost reduction. If that pay back period is short enough then a refi can be worth it. If your closing costs are legitimately $0 then its always worth a refi.

Just be aware if you're extending the loan to 30 year period and increasing your mortgage length.

No brainer. My rule of thumb is to get at least 0.2 difference in % points on a mortgage that has at least another 5 years on it. Might as well go for the 30 year--you can prepay it and save even more if you want.

Can you handle the payments of a 15 year loan? The rates could be at or below 3.5%.

You'll save roughly $165/month in interest to go from 4.875% to 4.25% the first few years. That steadily goes down as your principal reduces. Would you be will to spend $1000 to save $160/month for the next 10+ years? You should be willing to spend a few thousand easily for that kind of savings. You can use a financial calculator and find out how much value this interest rate deduction is worth to you.

Since I posted this question the rates have gone up a bit and I haven't started the refinance process although I think I will.

I have refinanced my home a few times and own four rental properties so I am quite familiar with the costs and how the yield spread premium can cover typical closing costs. I just wonder about the churn factor.

@mc suggests that a no closing cost refi that yields .2% is worth it. At some level I can see the point but on another it just seems like a lot of annoyance.

@Matt - for tax reasons I am working on paying off my rental property mortgages first so the $125/month would go to that. (two down and two to go.)

@JimL - I could handle a 15yr so maybe I should consider but as mentioned, I am working on the rental property mortgages first.

I agree with everything said above, a refi is a no-brainer. However, the more often you refinance, the longer you pay your mortgage. If you can't manage a 15-20 year loan, at the very least you should refi with a 30 year loan but make sure it has NO PRE-PAYMENT PENALTIES. Then pay more toward the morgtage each month, calculating the additional amount at what it would take to pay off the loan in 20-25 years. A rule of thumb would be to target the loan being paid off 30 years from when you first bought your house, more ideally... 30 years from your first house!

A problem I see too often is that after a person refinances several times, they end up paying off what was originally a 30 year mortgage in 40 years or more. Don't make that mistake, your interest savings would go up in smoke.

Best comments on a help a reader yet. I would listen to the crew warning about resetting the clock versus the crew who recommend to prepay the reset loan. I have heard it is possible to get specific length loans, like a 28 year. Now I'm not sure it'll lower your rate, but it is way better than starting anew. Whether you choose one with points depends on your saving reserves and how long you plan to stay. Never roll the costs into the mortgage. You are old hat to refinancing but don't let the annoyance get to you, after all it is a lot of money you stand to gain. I'll take that over saving $600 each year trying to maximize my Chase Freedom rewards credit card.

I own a mortgage company so I do these calculations every day.

$121 per month savings over 30 years = $43560. Of course you will add a year with a new term, so subtracting that 1 yrs P&I payments (approx $21K) from the above savings yields a net savings of $22,932.

This calculation is done with the 4.25% option. Even if that rate cost you $2000 in costs, you are still spending $2K to get a guaranteed retun of 10 times that amount.

You would be a fool not to do it as long as you kept the loan for the payback period, which in the hypothetical case above would be 16 months.

A different calculation, Refi'ng and continuing to pay the same payment as now (applying the $121 to principal each month pays the loan off in 26 years instead of the current 29 year pace. 3 years shaved at current $1719 P&I(am am guessing somewhat)saves you 61K in total P&I payments while you monthly costs remain the same as now.

So $2K to save 22K or 2K to save 61K. A bit more than an "annoyance" That is the decision. Whether to refinance at brainer.

When I refinanced my mortgage in 2009 (went from 5.75% to 4.75%) I was 5 years into my 30-year mortgage. When I refinanced, the new mortgage was for only 25 years so I stayed on my original payment schedule. My mortgage company quoted me rates and payments for different time periods, 15 yrs, 20 yrs, 25 yrs and 30 yrs.

I paid the $3500 closing costs from my savings (which was not earning that much interest from the bank) and did not roll those costs into my new mortgage.

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