3.75 vs 4.00

[Coronita]

…So, as another example, using the numbers from the previous example. If the person refinanced and reapplied the $150/month payment savings as extra principal payments (IE, he made the same monthly payment as before, but now an extra $150 goes towards principal reduction), he/she would end up saving $45428 in interest charges…

So, there’s so many variables one can play with…

[img_assist|nid=25818|title=Should I Refinance 2|desc=|link=node|align=left|width=600|height=800]

[Coronita]

Here’s the spreadsheet if you want to play around with it.

Again, disclaimer… No warranties. Use at your own risk.

https://drive.google.com/file/d/0B3UJwoJIbhtIT09iLWkxMzczYk0/view?usp=sharing

[HLS]

FLU,
You are a very smart guy BUT you made the calculations incredibly complicated.
HOWEVER in the above post, you nailed the holy grail
of the benefit of refinancing that 999 people out of 1000 (or probably 9999 out of 10,000) don’t get.

1.Lower your rate at no cost
2.Do nothing other than make the same payment that you have been making.

In the example above, it saves you $45,428 over the life of the loan for doing nothing more than lowering your rate AND making the same payment.
PERIOD. END OF STORY. QED

If you don’t keep the loan the full term, you still save money in interest every single day from the first day your refi is funded.
THERE IS NO PAYBACK PERIOD, There is no amount of time to recover (with a no cost loan)

Any spreadsheets or other convoluted way of trying to figure this out OR justify the benefit is nothing more than Intellectual activity that serves no practical purpose.

IF you choose to make a lower payment, you benefit a different way (i.e. monthly cash flow)

Most financial experts, including Suzi Orman and Dave Ramsey never understood the benefits of refinancing to a lower rate at no cost or how powerful it is or how to explain it.

***For the argumentative stooges who want to claim that there’s no such thing as a no cost (FREE) loan so therefore you shouldn’t even consider doing this (because if you paid more you MIGHT get more savings) and stay in a higher rate
(or because someone is going to make money for originating their loan)
I can only say that I FEEL SORRY FOR YOU.
HLS AKA “THE TROLL”

[Coronita]

[quote=HLS]FLU,
You are a very smart guy BUT you made the calculations incredibly complicated.
HOWEVER in the above post, you nailed the holy grail
of the benefit of refinancing that 999 people out of 1000 (or probably 9999 out of 10,000) don’t get.

1.Lower your rate at no cost
2.Do nothing other than make the same payment that you have been making.

In the example above, it saves you $45,428 over the life of the loan for doing nothing more than lowering your rate AND making the same payment.
PERIOD. END OF STORY. QED

If you don’t keep the loan the full term, you still save money in interest every single day from the first day your refi is funded.
THERE IS NO PAYBACK PERIOD, There is no amount of time to recover (with a no cost loan)

Any spreadsheets or other convoluted way of trying to figure this out OR justify the benefit is nothing more than Intellectual activity that serves no practical purpose.

IF you choose to make a lower payment, you benefit a different way (i.e. monthly cash flow)

Most financial experts, including Suzi Orman and Dave Ramsey never understood the benefits of refinancing to a lower rate at no cost or how powerful it is or how to explain it.

***For the argumentative stooges who want to claim that there’s no such thing as a no cost (FREE) loan so therefore you shouldn’t even consider doing this (because if you paid more you MIGHT get more savings) and stay in a higher rate
(or because someone is going to make money for originating their loan)
I can only say that I FEEL SORRY FOR YOU.
HLS AKA “THE TROLL”[/quote]

I got sick and tired of people talking about things without bringing real numbers and data to the table. Yes, I know this was an incredibly over abuse of math to prove a point. But sometimes that’s the only way it gets through people’s head.. Because it’s kind of hard to argue against math. Anyway peace.

[no_such_reality]

Most people don’t do the sweet spot. Most people refinance and pay what the monthly statement says. In that case, your mileage may vary.

Cutting short, math follows below. All of it really boils down to has the industry change compared to 2005-2011. Is no cost, no costs. No third party fees coming out of the woodwork?

So, how much hassle for $150/month? And even with some ‘costs’ creeping in, $150/month can pay.

In flu’s example, at 23 months, that’s pretty sweet spot. You will net close to $150/month ‘savings’ on the refinance if you pay the lower amount going forward (for the full 30 years). In the long run, the actual mortgages costs an extra $500 over the life of the loan. $500 30 years from now, LOL.

Total payments on the first loan for 30 years being $859,347. Payments on the refinance being, $54,903 towards the first and another $804,946 towards the second (over 30 years). Net $500 more trade off for $150 extra available cash per month.

That’s still a pretty deal IMHO.

If you are further in the loan, say four years, having made the first 48 payments, then refinancing and not making the increased payments will cost you $26,432 over the loan, again, monthly you pocket about $150, but the four extra years kill you.

The first loan still totals at $859,347. The first 48 payments weigh in at $114,580 and the refi-loan weighs in at $771,200 for a total payments to pay off of $885,780.

Of course, if you refi at 4 years in, keep making the prior payment, you will pay it off ‘early’ at month 299 of the new loan. It’ll save $33,039 over the current loan.

What’s $33,000 worth 25 years from now? About $17,500 assuming 2.5% inflation.

I get the lower rate will give more flexibility. I’ll have a “lower” outstanding principal at any given time, after eight years it’s finally $10K difference.

[no_such_reality]

There may be a better way to approach the no cost discussion.

If per the prior pages, 3.75% still nets a $1700 credit to the borrower.

If the borrower is at 3.875%, when doesn’t it make sense to refi to the 3.75% and take the credit?

Property taxes and insurance are two biggies, but let’s assume they’re funded with reserves.

Will the borrower walk out without paying anything, the same outstanding principal and $1700 in their pocket?

[Coronita]

[quote=no_such_reality]Most people don’t do the sweet spot. Most people refinance and pay what the monthly statement says. In that case, your mileage may vary.

Cutting short, math follows below. All of it really boils down to has the industry change compared to 2005-2011. Is no cost, no costs. No third party fees coming out of the woodwork?

So, how much hassle for $150/month? And even with some ‘costs’ creeping in, $150/month can pay.

In flu’s example, at 23 months, that’s pretty sweet spot. You will net close to $150/month ‘savings’ on the refinance if you pay the lower amount going forward (for the full 30 years). In the long run, the actual mortgages costs an extra $500 over the life of the loan. $500 30 years from now, LOL.

Total payments on the first loan for 30 years being $859,347. Payments on the refinance being, $54,903 towards the first and another $804,946 towards the second (over 30 years). Net $500 more trade off for $150 extra available cash per month.

That’s still a pretty deal IMHO.

If you are further in the loan, say four years, having made the first 48 payments, then refinancing and not making the increased payments will cost you $26,432 over the loan, again, monthly you pocket about $150, but the four extra years kill you.

The first loan still totals at $859,347. The first 48 payments weigh in at $114,580 and the refi-loan weighs in at $771,200 for a total payments to pay off of $885,780.

Of course, if you refi at 4 years in, keep making the prior payment, you will pay it off ‘early’ at month 299 of the new loan. It’ll save $33,039 over the current loan.

What’s $33,000 worth 25 years from now? About $17,500 assuming 2.5% inflation.

I get the lower rate will give more flexibility. I’ll have a “lower” outstanding principal at any given time, after eight years it’s finally $10K difference.[/quote]

Your missing the point of the $150/month extra you have. That $150/month is also compounded over 30 years. So whether you choose to use that $150/month to pay down your mortgage, or if you are really as good as an investor as people claim to be, you can try to arbitrage that $150/month on something with a higher return.

The extra “hassle” would be doing another application. And I’m not sure why people think $150/month over 30 years is “not worth the hassle”… A lot of people who run rentals would kill to have an extra $150/month positive cash flow…

$150/month is some people’s car lease or car loan. If you don’t think saving $150/month or cutting $45k off a 30 year loan, than you must be rich, and you don’t need a loan to begin with.

And keep in mind this is only with a 1/4 point difference, and no rebates from the bank. The banks were on top of that throwing $5-6k bonus in some cases, and in certain cases, I was able to refinance with more than a 1/4 point drop within 22 months.

[no_such_reality]

I think $150/month is worth some hassle. $150/month adds up.

Especially when you take $150 on the mortgage, another $150 on the TV/internet/phone. Another $150 one your mobile plans.

Pretty soon you’re talking real money for hassle every other year on each.

[Coronita]

[quote=no_such_reality]I think $150/month is worth some hassle. $150/month adds up.

Especially when you take $150 on the mortgage, another $150 on the TV/internet/phone. Another $150 one your mobile plans.

Pretty soon you’re talking real money for hassle every other year on each.[/quote]

Well, that’s also my point… I see so many times people trying to switch cell phone,cable, insurance providers to save what 20-30/month? Or me, that tries to open and close a bank account and get that bonus $500 sign on for owning and closing an account. Or others that try to use those 0% balance transfer offers…Now those are a PITA.

[ltsddd]

.

[Anonymous]

[quote=gzz]So it is not free money, rather you won a number of bets with banks. That’s great.[/quote]
Yup.

[quote]It wasn’t free because we took on risk to do so.[/quote]
Nailed it.

[Anonymous]

[quote=flu] And since I’m not a finance major, this might not be correct).[/quote]

I am a finance major, and your spreadsheet is incorrect.

[quote]less total interest to pay[/quote]

And that’s where it is flawed. Future cash flows must be discounted.

Total interest paid is an utterly useless value when evaluating debt instruments. A refi that drops you rate by 0.25% is not worth anywhere near $45K in today’s dollars.

The banks have done the math. You cannot outsmart them, the best you can do is understand the alternatives.

But there’s a more commonsense argument: Why would anyone pay you to buy their product?

HLS argues that if one can lower their rate with a no cost loan then it’s a no brainer to refinance. And this claim is absolutely correct. When rates are so far below your current rate that banks can offer “no cost” loans, then it absolutely is possible to lower a monthly payment at no cost other than some time and effort. There’s no debate there, but if HLS wants to keep insulting his imaginary opponents then carry on…

For the piggs who like to optimize their finances, the interesting question is whether a “no cost” loan is your best alternative in the situation where interest rates have fallen. Of course answer depends one’s personal situation. But in general if you expect to keep a property for more than a few years the long term benefit will be greater if you pay up front for a lower rate. (And yes the numbers are different if rates go down in the future, but nobody here can predict interest rate movements even if they have had a few good rolls of the dice in the past…)

Mortgage brokers peddle no cost loans because they are an easy sell. And they do have value when rates have fallen. But there may be even better alternatives.

[no_such_reality]

If we look at the comsumer bureau sample docs. http://files.consumerfinance.gov/f/201403_cfpb_loan-estimate_refinance-sample-H24D.pdf

For that $400K no cost loan @ 3.75% with $1700 credit.

Is the $1700 credit a page 2 section A negative point? Net amount of a negative point and waived/lender paid fees in section A? B? C?

Is it the net remaining on D?

Does it cover E?

Is it the entry on J?

Pretty much A, B, C, & E are costs, IMHO. So when it’s no cost these are all netted out and $1700 coming back?

F&G are prepaid expenses for things you already are paying

so what are we looking like?

[Coronita]

[quote=harvey][quote=flu] And since I’m not a finance major, this might not be correct).[/quote]

I am a finance major, and your spreadsheet is incorrect.

[quote]less total interest to pay[/quote]

And that’s where it is flawed. Future cash flows must be discounted.

Total interest paid is an utterly useless value when evaluating debt instruments. A refi that drops you rate by 0.25% is not worth anywhere near $45K in today’s dollars.

The banks have done the math. You cannot outsmart them, the best you can do is understand the alternatives.

But there’s a more commonsense argument: Why would anyone pay you to buy their product?

HLS argues that if one can lower their rate with a no cost loan then it’s a no brainer to refinance. And this claim is absolutely correct. When rates are so far below your current rate that banks can offer “no cost” loans, then it absolutely is possible to lower a monthly payment at no cost other than some time and effort. There’s no debate there, but if HLS wants to keep insulting his imaginary opponents then carry on…

For the piggs who like to optimize their finances, the interesting question is whether a “no cost” loan is your best alternative in the situation where interest rates have fallen. Of course answer depends one’s personal situation. But in general if you expect to keep a property for more than a few years the long term benefit will be greater if you pay up front for a lower rate. (And yes the numbers are different if rates go down in the future, but nobody here can predict interest rate movements even if they have had a few good rolls of the dice in the past…)

Mortgage brokers peddle no cost loans because they are an easy sell. And they do have value when rates have fallen. But there may be even better alternatives.[/quote]

So you claim to be a finance major. Ok. Well let’s see then.. You mention the spreadsheet is wrong. I’d like you to fix it so we are on the same page.

Seriously, I am not calling you out because I am calling you out. I am curious just exactly what you are talking about. On page two of this thread, you can download the spreadsheet. Make changes to this, and then re upload it.

If your really are a finance major that can optimize this to a tee, let’s see it.

Until you really use real numbers no one is going to believe your claim because you haven’t shown what you claim.

Let’s.cut the bullshit crap and show me real numbers.

And this is the part that you said, that I don’t quite get
[quote]
Total interest paid is an utterly useless value when evaluating debt instruments. A refi that drops you rate by 0.25% is not worth anywhere near $45K in today’s dollars.
[/quote]

Why is this useless, it seems like you are arguing in a circular way, because just a few threads ago you mentioned that refinancing adds more to your interest balance.

No one says say anything about present value of the $45k. But now that you mention it. If you want to consider present value, then wouldn’t you also need to consider the $150/month savings in refinancing. Afterall, the $150 you save in today’s dollars is certainly worth more than now than in the future?

Again, why don’t you modify the the spreedsheet with real numbers so we can see what you are talking about.

[FlyerInHi]

I just read this thread quickly.
Harvey is right, you have to evaluate the NPV of different alternatives based on the info you have today. That means is you want to keep the house/loan for a number of years it makes sense to buy down the rate. The loan with cost might be a better alternative.

One thing I remember about finance is that we assume that capital is unlimited or readily available, so we should choose the investment with the highest NPV. Problem is most people don’t have the cash to select the best alternative.

[Author]

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