Am I refinancing too many times? Any reason why I shouldn't refinance?

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Submitted by ninaprincess on November 12, 2012 - 1:24pm

I bought a house two years ago and refinanced from 5.25% to 4.5% and then again from 4.5% to 3.875%.

Now my broker is calling me with 3.375% [was 3.875%]and no cost. I want to do it but not sure if it is worth it or if there is any reason I shouldn't refinance again. Please advice.

Submitted by SK in CV on November 12, 2012 - 1:36pm.

Yes, there is a reason to not refinance again. The savings between your current loan at 3.875% and the new loan at 3.875% would be approximately zero.

Submitted by flu on November 12, 2012 - 1:50pm.

Each time you refinance, you extend your loan by X months, with Y additional interest payments.

Example.. If you had a 30 year loan, but refinanced 6 months later. You have to restart your loan...Your original loan would have finished 6 months earlier.

To come out ahead

1)You refinance with a lower rate (keeping in mind you said 0 cost)....Though you extend your loan, you total payments end up lower because of the lower rate, you paid less total interest.

OR

2)You get an almost same rate loan but get a nice cash rebate IN TODAY's dollar for refinancing, and that rebate is "better" than how much addition months of interest you pay by restarting your loan. For example, if refinancing puts $20000 cash in your wallet via rebate today but adds $24000 additional interest over the life of your loan (30 years)...It still might be worth it since the $20k today most likely will be worth a hell of a lot more than $24000 spread over 30 years (with the ever inflating dollar)... It would be your call...whether you value having $20k now ,or rather save $24k over 30 years.
Especially might worthwhile if you manage your money well and can grow that $20k you get now (versus spending it...Hopefully, you're not like most americans).

If you are currently with a 3.875% loan, you better be getting a nice rebate if you refinance again to 3.875%. It's something to consider if you're on a 30year loan..Because most of your payments during the start of the loan go to interest and not principal...

Generally, I consider refinancing if rates are .25% lower than my previous.. I'm on a 15 year BTW so my payments take more out of the principal than the 30yr.

Submitted by ninaprincess on November 12, 2012 - 1:59pm.

Sorry, I meant 3.375%.

Submitted by UCGal on November 12, 2012 - 1:59pm.

flu is right. You're extending the loan. And the new loan is slightly less - because you've paid some (not much) principal down.

A better way to approach it is to refinance when you have a significant drop in rates (like your first and 2nd refi). Then make the SAME payment... so you shorten the length of the loan.

That's what we did a few years ago - kept our payments the same, despite the new lower "minimum" payment... We knew we were able to make these payments. The extra amount is applied directly to principal.

We like seeing the principal go down so much, we increased our payments more. We're now looking at paying our house off completely in less than 2 years. I'm loving the idea that I'm close to being able to write a check for the balance on the mortgage at any time. (I'd do it now, but it would wipe out my emergency funds.)

Submitted by ninaprincess on November 12, 2012 - 2:06pm.

If I still owe $348000 with 3.875% and $1655 monthly payment and refiance again at 3.375% and still making the same original payment of $1655 how many less # of payment will I make? Or how much of today's money do I save? The math is too difficult. Do you have a program for this?

Submitted by flu on November 12, 2012 - 2:30pm.

ninaprincess wrote:
If I still owe $348000 with 3.875% and $1655 monthly payment and refiance again at 3.375% and still making the same original payment of $1655 how many less # of payment will I make? Or how much of today's money do I save? The math is too difficult. Do you have a program for this?

nina...It's really not that hard...You got all the tools on the internet for you to do the grunt work...

I'll try to outline it for you. Warning. I'm heavily medicated right now. So my thinking isn't exactly clear... You can let other piggs correct me....

Go to your favorite interest rate calc.. I use the one on iGoogle...

1.Punch in $348000 as loan amount with 3.375% interest rate.
a)Your monthly would be $1,538.49
b)Your total loan amount would be $553,858.13

2.Punch in your old loan amount with 3.875%
a)Your monthly should be $1655
b)Write what your total loan amount would be lets say Y

3. Figure out how many months of payment you made on your previous loan .. Let's say it was 3 months... Add up the interest only part of your first 3 months of payment using the amortization table...(This is money you kinda threw in the trash to the bank)

4. Subtract (2b)-(1b)-(3)

That's roughly how much it benefits you to refinance...

Big assumption...This assumes both your previous loan and your current loan had no points or cost...
If your previous loan had points and costs, then subtract that from #4 too, because that amount is also in the trash... So roughly

(2b)-(1b)-3- (points or cost in previous loan)....

If you can get 3.375 no cost, and your previous loan was 3.875...It makes sense to refinance. Because your loan balance will be lower the long run and your monthly is also lower... Win win..

Submitted by flu on November 12, 2012 - 2:31pm.

So nina... Since your original loan is 3.875 and your current loan is 3.375...

You have a few options. You could do the traditional refinance with no points/no cost and get the lowest rate... Or you can do what I think AN does and what Xboxboy does...

What they do is the get a loan with a slightly higher rate, but then the bank gives them back negative points. IE the bank gives them cash back today for taking the higher rate... It also make sense if you want to do something with the money (like invest it or such)....You're in a nice predicament in that you have a .50% difference. So you can do both. You can get a lower rate, have total smaller loan balance, and get a negative point rebate...

For instance if you decide to refinance at 3.5%, your monthly payment will still be lower than your original loan, your total loan will be lower, and you will get some cash back too (albeit maybe not that much)...

Yes, nina... You can have your cake and eat it too. :)

Submitted by ucodegen on November 12, 2012 - 3:29pm.

flu wrote:
For example, if refinancing puts $20000 cash in your wallet via rebate today but adds $24000 additional interest over the life of your loan (30 years)...It still might be worth it since the $20k today most likely will be worth a hell of a lot more than $24000 spread over 30 years (with the ever inflating dollar)... It would be your call...whether you value having $20k now ,or rather save $24k over 30 years.
I would avoid the cash out/cash back refi. It allows the finance companies to bump the interest rate up by about 0.5%. There was a copy of the rate sheet for Countrywide out somewhere. I don't have time to look for it right now.

Submitted by ucodegen on November 12, 2012 - 3:54pm.

ninaprincess wrote:
If I still owe $348000 with 3.875% and $1655 monthly payment and refiance again at 3.375% and still making the same original payment of $1655 how many less # of payment will I make? Or how much of today's money do I save? The math is too difficult. Do you have a program for this?
Need some additional info. What was the original principle (original amount you owed on the loan). How many years/months left on the loan? Anything else rolled into the payment? A quick calc came up with same that 'flu' at 1538.49/month on the new interest rate. I reran at the original interest rate of 3.875 and got a payment of $1636.43, so there is a discrepancy. Is the rate you are quoting calc'd as a year API or monthly interest cost? Anything else rolled in? I turned the calc around and calc'd how long the loan would last if you did a payment of $1655 at the new interest rate, and it was 26.6 years (would need to double check though).

Submitted by flu on November 12, 2012 - 3:57pm.

ucodegen wrote:
flu wrote:
For example, if refinancing puts $20000 cash in your wallet via rebate today but adds $24000 additional interest over the life of your loan (30 years)...It still might be worth it since the $20k today most likely will be worth a hell of a lot more than $24000 spread over 30 years (with the ever inflating dollar)... It would be your call...whether you value having $20k now ,or rather save $24k over 30 years.
I would avoid the cash out/cash back refi. It allows the finance companies to bump the interest rate up by about 0.5%. There was a copy of the rate sheet for Countrywide out somewhere. I don't have time to look for it right now.

I think there is a difference between cash-out versus just asking for an interest rate that's higher than prevailing.

For example, if the current interest rate is 3.375, you ask for 3.5..The lender will rebate you -X points because you took out a higher interest rate...

Submitted by desmond on November 12, 2012 - 4:01pm.

flu wrote:
I'm on a 15 year BTW so my payments take more out of the principal than the 30yr.

Yea, but you keep starting that 15 years over and over.................

Submitted by ninaprincess on November 12, 2012 - 4:18pm.

Original Balance: $352,000, 3.875%, 1655.23 payment.
Current Principal Balance $346,062
Loan Set up in March but I have made some small principal reductions.

Submitted by flu on November 12, 2012 - 4:21pm.

desmond wrote:
flu wrote:
I'm on a 15 year BTW so my payments take more out of the principal than the 30yr.

Yea, but you keep starting that 15 years over and over.................

But my overall cost goes down so does my payment... Heh heh. And it's on the bank's dime.

Submitted by spdrun on November 12, 2012 - 4:29pm.

If you can repay early without penalty, what's the difference? It's actually nice to have the flexibility of a longer time-frame/lower payment even if you don't use it.

Since the Bernanke Bucks are available, may as well use 'em.

Submitted by flu on November 12, 2012 - 4:35pm.

ninaprincess wrote:
Original Balance: $352,000, 3.875%, 1655.23 payment.
Current Principal Balance $346,062
Loan Set up in March but I have made some small principal reductions.

Your total loan would have $595884.43
Your monthly was 1655.23

So you've had this loan for 8 months.
It's not going to be entirely accurate because you made small pricipal payments along the way.

Total interest in 8 months.
was $9046 you paid.

(1136.67+1134.99+1133.31+1129.94+1128.24+1126.54+1124.83+1123.12)

So....
Roughly by refinancing,

You're saving (over the life of the new 30 loan)
595884.43-553,858.13-$9046=

$32980.30 by refinancing, and also lowering your monthly by 116.23/month..

Assumption... The BIG assumption is you stay keep your home and pay off your loan ... See, if you were to sell, say in 1-2 year, you might actually be worse off. Because that $9046 interest you paid went down the toilet. Also, you mentioned you refinanced before too. You also need to count how much interest you flushed down the toilet as a result of your first refinance....

Someone else can check my math.. Because i did this with a half brain and in a hurry.

Submitted by flu on November 12, 2012 - 4:52pm.

spdrun wrote:
If you can repay early without penalty, what's the difference? It's actually nice to have the flexibility of a longer time-frame/lower payment even if you don't use it.

Since the Bernanke Bucks are available, may as well use 'em.

Actually, there's a lot of people who feel that way, especially with Bernanke at the printing presses..

The thought process goes like this...
1)Today's dollars is worth a lot more than tomorrow. So better off to push out as much debt as you possibly can

2)With a lower monthly payment, you will qualify for more loans on your second or third home...That's actually a pretty valid point

I think this part is a kinda of a personal comfort...Some people feel comfortable having 30 year mortgage over their head. Me, if I were to refinance into a 30, I wouldn't be done until I was in my sixties.. I plan on retiring a lot earlier than that (I was shooting for 40, but healthwise, insurance is a problem...yes even with obamacare..but seperae issue)...

The other issue I think is if you're a perpetual refinancier, the 30 year for me is kinda discomforting.. because the principal reduction is really really low. It's not really a big deal in the long run, but I guess mentally I don't like to feel I've just given the bank so much money for nothing...

There's the other thought process is that well, you can take out a 30 year loan and make 15 year payments, and if some emergency comes up, revert back to the 30 year payment. Yes, this is probably a good strategy too.....Well, historically, the difference between 15 and 30 year loan rates was big enough and the thought process is that if you are already going to make 15 year payments, just get a 15 year loan anyway...But these days, rates are so much floored both the 15 and 30, it's really not *that* much different anyway...

Then there's the other thought process that if you plan on making your primary your rental, you want to get a 30 year loan so you can cash flow as much as you can... Good point too. But here's the deal on that one... You only need to really worry about that IF you think rates are gonna jump really quickly...If you think rates are gonna stay low for some time, you can take your candy ass time on a 15 year up until maybe a few months when you *think* you might move out (but not really) into a 30 year. That way, you've taken advantage of the principal paydown all along the way, and your principal has shrunken significantly, that you can then take out the 30, and make ridiculous monthly.

However, the other thought process is that some of these houses you shouldn't have as rentals anyway because you tie up too much equity for it to cash flow with a loan..But the other thought process is that interest rate is so low anyway, it doesn't matter. But the counter to that argument is that interest rates are low (for now)....But most likely not in the future...

So in other words that's my long ass way to say yes, I've sat through all the scenarios and thinkng about all the ands ifs and buts...And that I have become utterly paralyzed in what is the best decision...Ultimately I think the best decision is to settle on what you feel comfortable with..

Ultimately, my relative get's the cake for being a pure genius. She got a 1 year IO loan 1 million loan on with a 1.5% rate...For the past 5-6 years....They have on hand, and stick it in an safe investment that produces 4-5% tax deferred .. And since the loan is IO, everything is deductible on schedule A. Lol....

Submitted by AN on November 12, 2012 - 4:52pm.

flu, I would say it's down the toilet. I would say, it would be like renting your home for $9k over 8 months, which is $1130/month. Seems like a pretty cheap rent for a SFR. Do forget that if you refi, your interest payment will be lower by around $150/month from day one as well. After 2 years, that $3600. So, you save $3600 while "flushing down the toilet" $9k. If you consider $9k as flushing down the toilet, then the other side of that equation is she gets to live there for free over 8 months.

You're right about what I did and am doing. Rates/rebate are not linear. Example would be, a no cost loan on absolute mortgage is 3.375% but if you bump to 3.5%, you get about $3500 back. So, for $24/month more, you get $3500 up front. If rates drop again in a few months, you can refi again and keep that $3500. If you do it 2-3 times a year, that's over $7k, which more than enough to pay for your property tax, insurance, and part of the interest you "flushed down the toilet".

So, my answer to ninaprincess is, it depends on what kind of loans you did. If you did it like me and get credit back, then no, if you do 0 point, then yes. If you do a no cost loan, then it depends on how long you plan to keep the place.

Submitted by flu on November 12, 2012 - 5:00pm.

AN wrote:
flu, I would say it's down the toilet. I would say, it would be like renting your home for $9k over 8 months, which is $1130/month. Seems like a pretty cheap rent for a SFR. Do forget that if you refi, your interest payment will be lower by around $150/month from day one as well. After 2 years, that $3600. So, you save $3600 while "flushing down the toilet" $9k. If you consider $9k as flushing down the toilet, then the other side of that equation is she gets to live there for free over 8 months.

You're right about what I did and am doing. Rates/rebate are not linear. Example would be, a no cost loan on absolute mortgage is 3.375% but if you bump to 3.5%, you get about $3500 back. So, for $24/month more, you get $3500 up front. If rates drop again in a few months, you can refi again and keep that $3500. If you do it 2-3 times a year, that's over $7k, which more than enough to pay for your property tax, insurance, and part of the interest you "flushed down the toilet".

So, my answer to ninaprincess is, it depends on what kind of loans you did. If you did it like me and get credit back, then no, if you do 0 point, then yes. If you do a no cost loan, then it depends on how long you plan to keep the place.

yeah yeah yeah I know:) I'm not saying it's a flush flush in reality. For me, it feels like a flush.. Totally irrationale thinking. Maybe if I were to do over, I would get a 30 year. But I've gotten use to the 15 year, and like seeing this come off my books earlier...

Whather it's 15 year or 30 year, I think we all agree.. It's cheap money these days...So refi away.

I'm deferring refing until I get approval on a the other property I hope to close this year. Then I'll refi everything. My primary, my rentals...Probably will tap the heloc too, since the rate is 3% and I can beat that...

The point is, I want to drive my today's cost up so I recognize as close to a $0 gain as possible over the next few years. And meanwhile, I'll looking at some tax deferred or tax-exempt investments for the money I borrow that hopefully will beat the loan rate.

Submitted by ninaprincess on November 15, 2012 - 4:09pm.

I will refinance. Thank you for your advice.

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