[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]

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.

[Coronita]

[quote=harvey][quote=flu]Rustico, I don’t know ask a mortgage broker..

I’m stlll waiting, however, for a response from Harvey or BrianSD to correct the spreadsheet I put together. Afterall, both said it’s clearly wrong, and one of them said he is a finance major. So this should be a walk in the park for a finance major.[/quote]

Sorry dude, I’m not going to do your homework for you. A precise schedule would take a couple of hours to get right. If you and your buddy AN don’t believe I have “credibility” then I can live with that.

Just use the spreadsheet you have. It may be close enough for what you are trying to do, whatever that is. It seems you just want validation for your past decisions.

So here’s some validation: You outsmarted the bankers. They were chumps when they gave you that up front cash on a refi. They didn’t have an ulterior motive and didn’t even do the math. They were happy to reduce their bottom lines and make your insurance payments for you.

Yup, they just wanted to give you money. And you were smart enough to take it.[/quote]

You see Harvey that’s where you are wrong.

I don’t need validation for what I did in the past, because unlike most people, if I did something that less then optimal in the past and someone brings it up with actual data or proof, I want to know about it. Just like in the past when I was on the bandwagon of “now is not a time to buy more rental properties, where some folks sent me data that showed me otherwise”.

I just don’t like folks who argue for the sake of arguing, and then when asked, ok “well show your work”, nothing, zip, nada. In the past, for example, folks comment on real estate and places where they know nothing about (hence the term LETDLITA).

Here’s the thing I don’t get. If your arguments are really valid and easily shown, you would do it. You say you don’t want to “waste” your time to post real data

…BUT, you already wasted A LOT of your time to initially comment on this thread, and then check up many times on this thread, and to reply many times to this thread. So it seems like, at least to you, this thread is pretty important to you. So, if it’s so important to you to make your point, and if what you are saying is can be backed by a real example with real data from someone with finance background such that this would be so easy to, why wouldn’t you want to show people what you are talking about? Because after all, you already spent a considerable amount of time already expressing your opinion on this subject, and spent considerable number of days reading some of these threads, and responding to these threads. It’s not like anyone is really questioning your credentials. But, it’s just like many other times we see here from others. For example, someone else professing to be real estate expert in area X, despite not living in area X, not having been to area X, and then when asked for “more data’, getting into some off tangent comment about “construction quality of homes, the number of walls, and lizard-infested locations” that has nothing to do with the original discussion, as was exemplified by other posters.

So, if you are in the capacity to show us what you mean, why don’t you? I mean, certainly it’s more interesting, more relevant, and more useful to this blog than the 9+page about Donald Trump, or the 9+page of the 2016 Presidential Election, or the 9+page of reasons why someone can/cannot vote for Trump or Celebrity Endorsements. Afterall, this is an RE and to a lesser extent a finance blog. So why, if you are in the capacity to show us what you are talking about, why wouldn’t you?

I don’t think it would take hours. It certainly wouldn’t take any more hours than you have alreay spent on this blog commenting on this very thread, and reading every comment someone has typed on this thread.

Why now, when someone asks us if you can enlighten us what you are talking about, all the sudden is time so important to you?

Again, if you show me what you’re talking about, I’ll be happy to the first to admit decision I made in the past was sub-optimal or flat out wrong if that’s the case. I don’t care. I don’t have to be “proud” of my past decisions. Frankly, the only thing I care about, is having the right information so in the future I can make more money. So, if that means being wrong and called an idiot, fine. I can live with that.

[Coronita]

Rustico, I don’t know ask a mortgage broker..

I’m stlll waiting, however, for a response from Harvey or BrianSD to correct the spreadsheet I put together. Afterall, both said it’s clearly wrong, and one of them said he is a finance major. So this should be a walk in the park for a finance major.

[Coronita]

I still don’t see any updates and data from people with a finance background….

[Coronita]

[quote=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.[/quote]

Ok, show us then.

Now both Harvey and you are claiming to know how to evaluate this with NPV. I have yet to see anyone do this with numbers. Without that, to me that just seems like people just want to (again) argue for the sake of arguing.

So why doing either you or Harvey show us what you are talking about. Afterall, both of you seem to have a lot of time to be talking about politics on an RE forum..Asking you to show how how NPV works out in this case should be a walk in the park, for finance majors, right?

IT seems like now that BOTH you and Harvey brought up NPV to this discussion, you brought it up in a backassward way. Because, correct me if I’m wrong, but if someone is saving $150/month in the near term, isn’t that $150/month freed up today available for someone to use EITHER to pay more principal on a mortgage OR to invest it elsewhere?

So in the case of paying the mortgage off early, it’s like putting that $150/month to work in a 3.75% ROI… Or if the person doesn’t pay that extra $150/month and invests it elsewhere, whatever that ROI is? In either case, how is either or both scenarios worse off than not refinancing and having to pay the bank an extra $150/month, when at the end of either loans (either continuing to pay loan 1 or refinancing to loan 2), neither is really paying more total interest (which Harvey now also says, evaluating total interest is meaningless), and if the bank is also adding a cash rebate up front of $5-10k?

Of, if one does want to bring up NPV, isn’t it also incorrect than to compare loan1 and refinanced2loan by total interest paid having to be equal, “otherwise you lose”? Afterall, if you refinance and extend your loan out an additional 5 years, interest paid for those 5 years, even if more also needs to be discounted to present value and compared to the ROI of your cash back up front and the $150/month cash savings you get immediately?

This doesn’t appear to be rocket science, but now you folks are bringing up NPV and seems like over-complicating things.

[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.

[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.

[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.

[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.

[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

[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]

Oh just stop people, will you? Grind through the number yourself. It might make sense to refi, it might not. It depends on your personal situation.

Here is a screenshot of the rough spreadsheet I was using for my own situation….

[img_assist|nid=25817|title=Should I Refinance?|desc=|link=node|align=left|width=500|height=800]

Let me explain how this works. (again again, this was something I put together in 15 minutes at the time. And since I’m not a finance major, this might not be correct).

1. Loan #1 represents your first loan
2. Loan #2 represents your refinanced loan

3. The loan term is in months (360 for 30 year), and the monthly interest rate is used (4% yearly divided by 12)

4. I believe the monthly payment is determined by the same formula used to determine present value of an annuity.. So the payment = p * r / (1- (1+r)^(-t)
where p is you total loan, r is your monthly interest rate and t is the loan term in months.

5. I created two amortization tables (which you can’t see).
The first table amortizes the first loan using a loan balance of $500k
The second table amortizes the second loan, using a loan balance based on the month of the first loan you decided to refinance

6. In my example (cell c11), I hypothetically decided to refinance 22 months into my 4% first loan….

a. On month #22, I would still have a principle of 483583.74 (row 12)
b. Up to that point, I would have paid 36,099 in interest charges alone (row 19) on the first loan,
c. I would have had a remaining 359347 in interest charges for the remainder of the loan

7. If my new loan was .25% lower (3.75%)
a. My total interest paid on the new loan would be $322654.8741, about $600 lower than if I finished my original 30 year loan
b. My monthly payment would be lower by $150/month (row17 and row 7)
c. If the bank was also offering $3000-4000 rebate on top of a no out of pocket closing costs (which many times they were), that’s even more icing on the cake…Free money.

Lower monthly payment, less total interest to pay, plus cash up front.
Win, win ,win.

And hence, why I was a serial refinancer of 2 years or sometimes less or if rates dropped by more than 0.25%. If you actually played around with the spreadsheet, you would notice that in the absence of any additional rebates, 22 months is roughly the cutoff for my loan balance at the time, where you would lower your monthly payments AND also not pay more total interest over the life of both loans. That 22 months extended to more months once the lenders started to get crazy and added free upfront rebate cash on top of that, effectively paying me to refinance to a lower rate and lowering my total interest.

That is not to say that refinancing even if your total paid interest goes slightly up in return for a much lower monthly payment is bad either. It depends on what you plan on doing with the extra savings in your monthly payment. I mean, with that savings in monthly payment, you could use it to pay down the principal portion of your new 30 year loan too, which would effectively lower your total interest paid on your new loan.

I just chose to keep things simple, refinance when both lower payments and total paid interest is break even or lower than before. (Well, at least until my financial situation changed for the better, and I didn’t feel comfortable leaving most of net worth in the stock market, so I refi’d to a 15 year and then eventually paid it off.)

So again, whether one should refinance or not, the answer is “it depends”.

Sorry for the long post. But unlike BG’s post, at least mine has a workable spreadsheet and data.

[Coronita]

[quote=Hobie]This is the good Pigg discussion I like to see !!

I’ll add, I think she will cash flow out and you would be stuck trying to evict her. Seems with only $75k, now add her medical, UTC HOA, and taxes, not enough money. On top of that by the time the s*it hits the fan, you would be on the hook for back HOA and fees as you are an ‘owner/partner’. No actual life tenant agreement here, just a weak stab to shill you.[/quote]

Good point.

I really hate how some of these people exist. One my reasons why I wouldn’t want to “partner” with anyone I don’t know well, and even then, I am reluctant to.

[Coronita]

Holy sheet.

http://www.kitco.com/

Looks like metal prices are taking off again. damnit.

What’s up with all this volatility and speculation?

Even silver looks to be approaching $18/ounce. It was around $15 just a few months ago.

[Author]

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