3.75 vs 4.00

[an]

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[Anonymous]

LOL, babbling on this forum doesn’t take any mental effort – it’s actually the opposite, a mental escape.

Spreadsheets and calculations are work. It was my job. It still is occasionally. I’m still intellectually curious but I’m not gonna do unpaid tedious calculation work to prove a point to somebody who I think already gets it.

You don’t need a spreadsheet or “real numbers” to understand the basic tradeoff. Higher up front fees, lower rate. Lower or negative fees, higher rate. Fees are a short term gain, rate is a long term gain. Over time, long term wins. If rates change, then the numbers change, but not the basic tradeoff. And nobody can predict rate changes.

That’s it. If you don’t get it I’m not going to try and spell it out with numbers because I know you can and probably do get it.

I’m not curious about the numbers at all in this mundane financial question. I’m curious about people. Like how smart people aren’t at all suspicious when somebody pays you to take their product.

(The answer is in this very post.)

Human behavior is far more interesting than numbers.

[Coronita]

I’m going to be like BG and do this cut up your quote and comment on everything….

[quote=harvey]
You don’t need a spreadsheet or “real numbers” to understand the basic tradeoff. Higher up front fees, lower rate. Lower or negative fees, higher rate.
[/quote]

I agree with this…I don’t think anyone disagrees with this

[quote]
Fees are a short term gain, rate is a long term gain. Over time, long term wins. If rates change, then the numbers change, but not the basic tradeoff. And nobody can predict rate changes.
[/quote]

This is where people disagree. Again, back to where I said “it depends”. Let’s consider the two practice scenarios for a homeowner

Scenario 1: You are buying a home. You need to get a loan for this home.
Should you (a) take out a no (out of pocket) cost loan or should you (b) pay points/cost and get a slightly lower rate loan. What is the best decision?

Scenario 2: You already have a loan on an existing property. Rates for a no-cost-loan fall below 0.25 or more below your original loan. Should you refinance? If so, should pay points/cost to lower the rate even further.

In the case of Scenario (1), there’s really no “for sure” right way of doing this. You might make and educated guess, and the stars might align with your guess, but it’s a crapshoot at best.

1a) On one hand, you could take out a no-cost-loan, and then rates move up, and you won’t be able to refinance. In this scenario, if you kept the house for 30 years, overall, you pay more total interest (assuming paying points/closing costs lower your rate, which it does).

1b) On the other hand, if you paid points and cost, and then rates fall flat on your face and a no-cost-loan rate ends up being much lower than your loan you take out with points and costs, then you just wasted your money paying points and costs. In this scenario, if you don’t refinance, you end up paying more total interest by staying in your original loan that refinance to a low cost loan. But if you did refinance, than the points/cost you paid on the original loan to get a lower rate was useless.

Also, since you brought up present value….

In scenario you paid for points/cost to get a lower rate
a) you are giving up opportunity cost of present day dollars for the amount you paid in points/cost to invest in higher return.
b) You don’t know if you will stay with the entire 30 year loan. If you sell your home or refinance again, your total interest savings from buying down your loan up to ending the loan might be less than the points/cost you paid to lower that rate.

In the scenario you took out a no-cost loan.
a) There the opportunity cost of paying slightly more each month, versus investing better/worse than giving up a lump sum today (as points/cost)

In appear there’s really no clear cut “right” way to do this. “How right” you are in picking depends on how rates moved to your guess and how well you do with your investments of upfront money you would have to pay for points/cost and how long you actually kept that loan (for example, you sell the home or refinance). Since none of us can predict how interest rates will move nor how our investments do, we make an educated guess based on an opinion (supported by our individual interpretations of the what will happen to loan rates and how our individual investments will do).

In Scenario 2, regardless of which kind of loan you took out originally, if rates fall significantly below what your original loan, in the very least you should refinance into something lower than your original loan rate,
if cost(if any)+total interest of old loan is more than cost(if any)+total interest of new loan. a no-cost-loan has immediate benefit compared to your original loan (no matter what kind of loan it was)…. You might be able to pay more points/cost to lower your rate even further, but then again, you run into the same possible scenarios as described above with your first loan, in which there might not be a benefit to doing this because of the other factors.

[FlyerInHi]

flu, maybe you’re making things too complicated.

The decision to refinance is separate from the loan product your want to select. Decide if refinancing makes sense, then select from alternative products.

All the talk of “no cost” is just salesmanship and confuse things.

Rates kept on moving down. The right decision from the beginning was to go adjustable.

[no_such_reality]

I’m still waiting on the no costs costs in th new disclosures.

Overall you’re all over complicating it. Th analysis is simple long term versus short term is relatively moot and you don’t need to worry about all the options out there.

All you need is what your current loan and financial situation is and what the one loan being proposed with what it will cost you in cash today (or rebate). HLS comp for it is a nice to know but irrelevant as you aren’t paying him directly (unless you negotiate to do that and then IMHO you’re bucking the whole industry)

The real key though is we currently are living in a bit of a mortgage bizarro world. There’s a lot of money out there looking for a home. So yes, they will pay you, thousands to take their 30 year mortgage at 3.75% because their alternative is 2.6% on a treasury. Or some other person taking the 3.5% or riskier person taking the same 3.75%

If you keep their loan more than a short period, they come ahead compared to you having their cheaper loan, but you’re still better off than you were.and you would have had to shell out money to get the lower loan.

So just get used to being a cow getting milked, that’s how the industry has relegated you.

[Anonymous]

[quote=FlyerInHi]
The decision to refinance is separate from the loan product your want to select. Decide if refinancing makes sense, then select from alternative products.[/quote]

Exactly. The first choice is whether to play at all, the second choice is to find the bet with the best odds.

If rates have dropped more than half a point or so, any refi bet will have very favorable odds, but some have better odds than others.

All this agonizing over whether rates will go up or down or whether someone picked the right bet in the past is irrelevant.

At the craps table, any bet can win and and any bet can lose. But some bets have much better odds than others. Previous rolls of the dice don’t change the odds. Even if the bet with the better odds loses multiple times, it doesn’t change the odds of the table.

And yet people who understand this logic clearly do not always apply it in their own decisions.

https://en.wikipedia.org/wiki/Loss_aversion

[scaredyclassic]

My dad believed in betting on a hot roller

[Coronita]

[quote=harvey][quote=FlyerInHi]
The decision to refinance is separate from the loan product your want to select. Decide if refinancing makes sense, then select from alternative products.[/quote]

Exactly. The first choice is whether to play at all, the second choice is to find the bet with the best odds.

If rates have dropped more than half a point or so, any refi bet will have very favorable odds, but some have better odds than others.

All this agonizing over whether rates will go up or down or whether someone picked the right bet in the past is irrelevant.

At the craps table, any bet can win and and any bet can lose. But some bets have much better odds than others. Previous rolls of the dice don’t change the odds. Even if the bet with the better odds loses multiple times, it doesn’t change the odds of the table.

And yet people who understand this logic clearly do not always apply it in their own decisions.

https://en.wikipedia.org/wiki/Loss_aversion%5B/quote%5D

Now you are sounding to be in agreement eith wjat i was assertinf all along. It depends…

So Harvey, the entire rathole you took us down on this thread was your argument that no cost loans are ALWAYS worse than loans when you pay for the cost up front. Are you now saying that isn’t the case?
Since we are playing arm chair quarterback in which we did have a period of 5-6 years of declining rates, are you stilling arguing it would have made sense to pay point and costs along the way down?

I think we might be agreement that either bet is a bet. But it’s still not clear to me if you still think people would have been better off paying costs up front during the past 5-6 years when we had a rate decline. So what is your position on this?

[Coronita]

[quote=FlyerInHi]flu, maybe you’re making things too complicated.

The decision to refinance is separate from the loan product your want to select. Decide if refinancing makes sense, then select from alternative products.

All the talk of “no cost” is just salesmanship and confuse things.

Rates kept on moving down. The right decision from the beginning was to go adjustable.[/quote]

No briansd, you are making this thread more complicated by interjecting into this thread without following the entire thread. But that ok, I don’t mind.

[FlyerInHi]

Flu, I think you’re saying that “no cost” loans are better because they allow you to refinance again and again, guilt free (loss avoidance. You’re not “throwing away” out of pocket fees. That’s the marketing angle.

But past is past. Make decisions based on what you know today.

[bearishgurl]

[quote=FlyerInHi]Flu, I think you’re saying that “no cost” loans are better because they allow you to refinance again and again, guilt free (loss avoidance. You’re not “throwing away” out of pocket fees. That’s the marketing angle.

But past is past. Make decisions based on what you know today.[/quote]

In response to the italicized portion, maybe so. But a person who is a “serial refinancer” is still starting over again at 30 years every single time they refinance … that is, unless they choose a 15-year loan (with much higher payments). However, the vast majority of refinancers do so for the express purpose of lowering their monthly payments (thereby increasing monthly cash flow).

[Anonymous]

[quote=flu]So Harvey, the entire rathole you took us down on this thread was your argument that no cost loans are ALWAYS worse than loans when you pay for the cost up front. Are you now saying that isn’t the case?[/quote]

I never said that “no cost” loans are always “worse.”

My assertion is that the term “no cost” is misleading and that I would be suspicions of taking advice from someone emphasizing a product with a deliberately misleading name.

And even if you are getting a square deal, the tradeoff with “no cost” loans favors the short term horizon. If you plan to keep a property for many years, in general paying down the rate will likely give one a better outcome.

I don’t care about anyone’s personal anecdotes to the contrary. Math tells us to never hit on a hard 17. Just because have done so and still won doesn’t change a thing.

[no_such_reality]

Using flu’s spreadsheet, and a 2.5% discount rate and the prior 1.5 point spread from the $400K loan ( applied to Flu’s loan for example), his lowest total discounted cost would be to pay the points and current payment. Basically adding 50% to his present value savings over current by paying up front.

We get the following NPVs.

Existing Loan 1 run to completion:
NPV cost $576K.

Loan 2 with current payment:
NPV cost $557K. $19K net savings.

Loan 2 with 30 year payment:

NPV cost $566K. Still better than current (provided he’s not paying $10K to do it. 😉 )

Loan 3 (not on sheet), pay the 1.5 pts spread in HLS example, drop rate to 3.5% 30 yr standard amort payment instead of loan 2.
NPV cost $557K. That amount includes the $7500 paid up front to close. Note, roll the points in and the NPV remains the same.

Loan 3 with the $7500 (1.5 pts) rolled in and current payment (overpayment):
NPV cost $550K

Loan 3 with the $7500 (1.5 pts) up front and current payment (overpayment):

NPV cost $547K (ugh dropped a minus sign, corrected)

[Coronita]

[quote=bearishgurl][quote=FlyerInHi]Flu, I think you’re saying that “no cost” loans are better because they allow you to refinance again and again, guilt free (loss avoidance. You’re not “throwing away” out of pocket fees. That’s the marketing angle.

But past is past. Make decisions based on what you know today.[/quote]

In response to the italicized portion, maybe so. But a person who is a “serial refinancer” is still starting over again at 30 years every single time they refinance … that is, unless they choose a 15-year loan (with much higher payments). However, the vast majority of refinancers do so for the express purpose of lowering their monthly payments (thereby increasing monthly cash flow).[/quote]

God, I am not saying no cost loans are always better. I am saying it depends on your situation which depends heavily on whether you want/can pay more up front or want to pay over the long term, and use more of your upfront cash for something else.

Sheesh.

[an]

[quote=FlyerInHi]Flu, I think you’re saying that “no cost” loans are better because they allow you to refinance again and again, guilt free (loss avoidance. You’re not “throwing away” out of pocket fees. That’s the marketing angle.

But past is past. Make decisions based on what you know today.[/quote]
Do you have a crystal ball i can borrow?

[Author]

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