Mortgage refinance.
November 3, 2010 9:59 AM Subscribe
A mortgage refinance question. Numbers rounded off a little for simplicity.
Currently, I have a Wells-Fargo 15-year mortgage, originated in 2003 at 5%, for a monthly payment of $1300. The remaining balance is $86K. They are offering a no-fee refinance of the balance with a 15-year at 3.875%, for a monthly payment of $800.
So, with this refinance, I could continue paying the $1300/month, with some of what was going toward interest now going towards principal.
What am I missing? Why would I not do this?
I asked a number of times, what's the catch?, where's the fee?, but they insist there is no catch, no fee.
Currently, I have a Wells-Fargo 15-year mortgage, originated in 2003 at 5%, for a monthly payment of $1300. The remaining balance is $86K. They are offering a no-fee refinance of the balance with a 15-year at 3.875%, for a monthly payment of $800.
So, with this refinance, I could continue paying the $1300/month, with some of what was going toward interest now going towards principal.
What am I missing? Why would I not do this?
I asked a number of times, what's the catch?, where's the fee?, but they insist there is no catch, no fee.
Ask them about points. If there are really no points, fees, etc., and IF you are disciplined enough to pay the extra, which you seem to be, go for it. You should be presented with a reconciliation sheet (has a name I forget) that will show every penny you are paying. Get this before you pay for an appraisal. With no fees, you can back out with no expense.
It's possible they got nailed for some bad behavior and have to make nice?
posted by theora55 at 10:24 AM on November 3, 2010
It's possible they got nailed for some bad behavior and have to make nice?
posted by theora55 at 10:24 AM on November 3, 2010
Eight years at $1300 a month at 5% is $124,800. Fifteen years at $800 a month at 3.875% is $144,000. There's your catch.
Of course, if you keep your payment at $1300 a month, you'd probably pay off the refinance in early 2018, for a total of $115,170. You could always take that $500 and do something else with it, but 3.875% isn't a terrible return these days.
These figures assume you're paying about $170 a month in insurance and taxes either way.
posted by valkyryn at 10:29 AM on November 3, 2010
Of course, if you keep your payment at $1300 a month, you'd probably pay off the refinance in early 2018, for a total of $115,170. You could always take that $500 and do something else with it, but 3.875% isn't a terrible return these days.
These figures assume you're paying about $170 a month in insurance and taxes either way.
posted by valkyryn at 10:29 AM on November 3, 2010
Response by poster: restless_nomad:
I think you are correct, if I do take 15 years, then maybe they do benefit. However, if I continue with the same payment of $1300, it will be paid in slightly less time than currently.
theora55:
It's financed thru Freddie Mac/Fannie May ... ultimately stimulus $.
No appraisal is required
posted by allelopath at 10:30 AM on November 3, 2010
I think you are correct, if I do take 15 years, then maybe they do benefit. However, if I continue with the same payment of $1300, it will be paid in slightly less time than currently.
theora55:
It's financed thru Freddie Mac/Fannie May ... ultimately stimulus $.
No appraisal is required
posted by allelopath at 10:30 AM on November 3, 2010
3.875 for 15 years with a ton of equity is actually not a low rate right now. Google gives me something almost 50bps lower for a conforming 15 year with 50% equity.
posted by JPD at 10:31 AM on November 3, 2010
posted by JPD at 10:31 AM on November 3, 2010
They may be counting on the typical lack of discipline in someone who says they will just keep paying the same $1300 each month. What about the month that the water heater breaks? Or the month that you need to attend a distant funeral? Or the month you get hurt and not only have hospital bills but you are out of work for 3 weeks? If the payment is ACTUALLY $1300, there is a different psychology about the decision of where to get the money to pay for those incidents.
posted by CathyG at 10:34 AM on November 3, 2010
posted by CathyG at 10:34 AM on November 3, 2010
Response by poster: valkyryn:
So if I do this and continue with the $1300/month, it looks like I will save (124,800 - 115,170) = $9630 in interest.
posted by allelopath at 10:38 AM on November 3, 2010
So if I do this and continue with the $1300/month, it looks like I will save (124,800 - 115,170) = $9630 in interest.
posted by allelopath at 10:38 AM on November 3, 2010
Response by poster: JPD:
I see what you are saying, but then with other loans, there will likely be fees.
posted by allelopath at 10:40 AM on November 3, 2010
I see what you are saying, but then with other loans, there will likely be fees.
posted by allelopath at 10:40 AM on November 3, 2010
Do your own math using accurate figures--I used this calculator--but something like that. Of course, if you stick the $500 a month in a bond with a 4% yield, you save even more, etc.
But yes, the "catch" seems to be that you're on the hook for almost an extra $10k of interest because you're doubling the remaining time on the loan.
posted by valkyryn at 10:41 AM on November 3, 2010
But yes, the "catch" seems to be that you're on the hook for almost an extra $10k of interest because you're doubling the remaining time on the loan.
posted by valkyryn at 10:41 AM on November 3, 2010
valkyryn - that math isn't right for comparing costs - it needs to be discounted by some discount rate, not just nominal numbers. But the actual point still stands, you end up paying more, because you are lengthening the term of the loan.
If you currently have an 86k balance and can afford 1300/month you could get an insanely cheap 7/1 or 5/1 ARM and pay the whole thing off before it resets - that would be your cheapest option. You don't need to pay for the interest rate protection of a longer dated fixed rate mortgage.
allelopath - Those numbers I quote were APR's not rate, so they include the fees.
posted by JPD at 10:48 AM on November 3, 2010
If you currently have an 86k balance and can afford 1300/month you could get an insanely cheap 7/1 or 5/1 ARM and pay the whole thing off before it resets - that would be your cheapest option. You don't need to pay for the interest rate protection of a longer dated fixed rate mortgage.
allelopath - Those numbers I quote were APR's not rate, so they include the fees.
posted by JPD at 10:48 AM on November 3, 2010
JPD is correct. If you can continue to pay $1300 per month which means you will pay off the loan in seven to eight years, then a 7 year ARM at 3.375 interest will save you money even if you have to pay $1000 in fees. But you must be sure that you can pay it off before the rate resets. Even if you can't quite swing paying it all off in seven years, your remaining balance might be low enough that rising rates won't hurt much.
If you can't be sure of making those payments, then the no-fee refinance you have before you is still a no-brainer.
The reason the bank is offering this is because they make some money up front on the origination fees for the loan. You don't see this fee because it is rolled into the interest rate which is slightly higher than you would get if you paid these fees yourself. For example, if you paid the fees yourself, you might get a 3.375% rate as described above.
But it is advantageous for you to pay nothing up front and still get a lower rate than you are paying now. It is a win for you and a win for the bank. There is no catch. You pay nothing out of pocket and get lower payments. Thank the lousy economy for the low interest rates and go for it.
It boils down to uncertainty. If you need the guarantee of a 15 year fixed rate, you will pay a little more. If you can deal with the uncertainly of paying off a 7/1 ARM, then you can save a little more.
posted by JackFlash at 11:07 AM on November 3, 2010
If you can't be sure of making those payments, then the no-fee refinance you have before you is still a no-brainer.
The reason the bank is offering this is because they make some money up front on the origination fees for the loan. You don't see this fee because it is rolled into the interest rate which is slightly higher than you would get if you paid these fees yourself. For example, if you paid the fees yourself, you might get a 3.375% rate as described above.
But it is advantageous for you to pay nothing up front and still get a lower rate than you are paying now. It is a win for you and a win for the bank. There is no catch. You pay nothing out of pocket and get lower payments. Thank the lousy economy for the low interest rates and go for it.
It boils down to uncertainty. If you need the guarantee of a 15 year fixed rate, you will pay a little more. If you can deal with the uncertainly of paying off a 7/1 ARM, then you can save a little more.
posted by JackFlash at 11:07 AM on November 3, 2010
They offered me the same thing in 2004, and I refinanced a 30 year loan into a 15 year loan. The downside, as described above, is the resetting of the clock.
The benefit that I saw for the bank is that they keep your business. With rates as low as they are now, there is always the risk that you will refinance somewhere else, and by offering this no cost refi to you, they are keeping your business.
posted by dforemsky at 11:21 AM on November 3, 2010
The benefit that I saw for the bank is that they keep your business. With rates as low as they are now, there is always the risk that you will refinance somewhere else, and by offering this no cost refi to you, they are keeping your business.
posted by dforemsky at 11:21 AM on November 3, 2010
JackFlash - you can get a 7/1 arm for cheaper then 3.375 right now so the math is even easier. But it is KEY that you can pay it back before it resets.
You can get the conforming 15 for 3.375 so to answer the question about fees - the difference in 50 bps for an 86k loan is about 20 bucks a month. discounted back at 3%, thats about 3k - so thats what Wells is effectively charging you in fees.
posted by JPD at 11:37 AM on November 3, 2010
You can get the conforming 15 for 3.375 so to answer the question about fees - the difference in 50 bps for an 86k loan is about 20 bucks a month. discounted back at 3%, thats about 3k - so thats what Wells is effectively charging you in fees.
posted by JPD at 11:37 AM on November 3, 2010
Response by poster: That's a very good point about the 7/1 ARM. If I remain employed it would not be a problem. I plan to remain employed, but I have been laid off before, so I would not want to live the next 7 years in stress like that.
posted by allelopath at 12:08 PM on November 3, 2010
posted by allelopath at 12:08 PM on November 3, 2010
JPD: You can get the conforming 15 for 3.375 so to answer the question about fees - the difference in 50 bps for an 86k loan is about 20 bucks a month. discounted back at 3%, thats about 3k - so thats what Wells is effectively charging you in fees.
Yeah, but the bank doesn't really assume the average person keeps a 15 year loan. The average length is about 7 years so 3K is probably a high estimate. Assuming efficient mortgage markets, the embedded fee in the higher rate is probably close to what you would explicitly pay for the lower rate, assuming the typical 7 year payoff. If you take the no fee mortgage and pay it off in less than 7 years, you win. If you pay it off in 15 years, the bank wins.
posted by JackFlash at 12:31 PM on November 3, 2010
Yeah, but the bank doesn't really assume the average person keeps a 15 year loan. The average length is about 7 years so 3K is probably a high estimate. Assuming efficient mortgage markets, the embedded fee in the higher rate is probably close to what you would explicitly pay for the lower rate, assuming the typical 7 year payoff. If you take the no fee mortgage and pay it off in less than 7 years, you win. If you pay it off in 15 years, the bank wins.
posted by JackFlash at 12:31 PM on November 3, 2010
of course of course. Really I was just trying to point out that it isn't a "No-fee" re-fi.
posted by JPD at 12:48 PM on November 3, 2010
posted by JPD at 12:48 PM on November 3, 2010
allelopath: That's a very good point about the 7/1 ARM. If I remain employed it would not be a problem. I plan to remain employed, but I have been laid off before, so I would not want to live the next 7 years in stress like that.
One way to think about it is that the difference in monthly payments between the 15 fixed and 7/1 ARM is the cost of an insurance policy that protects you against rising interest rates if for some reason you can't keep up the extra principle payments. If it costs you $20 or $30 a month to sleep better, you may decide it is worth it. If everything goes well and you pay off the loan in seven years, that insurance policy cost you a couple thousand bucks. If on the other hand some financial misfortune occurs, you can fall back to the minimum $800 payment and keep your home. If inflation spikes, you may even come out ahead by paying the minimum and investing the rest.
posted by JackFlash at 1:08 PM on November 3, 2010
One way to think about it is that the difference in monthly payments between the 15 fixed and 7/1 ARM is the cost of an insurance policy that protects you against rising interest rates if for some reason you can't keep up the extra principle payments. If it costs you $20 or $30 a month to sleep better, you may decide it is worth it. If everything goes well and you pay off the loan in seven years, that insurance policy cost you a couple thousand bucks. If on the other hand some financial misfortune occurs, you can fall back to the minimum $800 payment and keep your home. If inflation spikes, you may even come out ahead by paying the minimum and investing the rest.
posted by JackFlash at 1:08 PM on November 3, 2010
I am not your financial advisory. All advise is purely hypothetical.
I would wait for QE2 to see how treasury rates are depressed. With the amount of equity you have in your OM, you should be able to shave down that interest rate hopefully by 75-100bps if the timing is correct. I could envision refi to a lower monthly rate and returning capital at your present rate, which will net you a handsome return. Make sure there aren't provisional penalties for early payment. Seek multiple offers and compare judiciously.
Regards
posted by Hurst at 1:42 PM on November 3, 2010
I would wait for QE2 to see how treasury rates are depressed. With the amount of equity you have in your OM, you should be able to shave down that interest rate hopefully by 75-100bps if the timing is correct. I could envision refi to a lower monthly rate and returning capital at your present rate, which will net you a handsome return. Make sure there aren't provisional penalties for early payment. Seek multiple offers and compare judiciously.
Regards
posted by Hurst at 1:42 PM on November 3, 2010
eh - the ten year is at 2.67%, and the general thinking is QE steepens the yield curve, so I'm not sure why you think there is a great chance of the benchmark trading in 100 bps, and I doubt you can bet on the spread decreasing.
posted by JPD at 2:01 PM on November 3, 2010
posted by JPD at 2:01 PM on November 3, 2010
I downloaded a fantastic spreadsheet from here that let's me model mortgage related stuff.
By plugging in some numbers based on the information you provided,
A. Your original loan amount was probably around $165k.
B. You stated that you still owe around $86k. If you refinance that at 3.875%, 15 Years Fixed, your monthly payment is going to be around $630.
C. If you continue to pay $1300 a month, you'll be paying an extra $630 a month towards your principal.
D. You will pay off your loan and be done with it by May 2017.
As for fees and such, they are required by law to provide you with a Good Faith Estimate (GFE). Scrutinize it. Study it. Ask LOTS of questions. Though WFB is a pretty reputable bank, it's your money and your life!
posted by apark at 2:08 PM on November 3, 2010
By plugging in some numbers based on the information you provided,
A. Your original loan amount was probably around $165k.
B. You stated that you still owe around $86k. If you refinance that at 3.875%, 15 Years Fixed, your monthly payment is going to be around $630.
C. If you continue to pay $1300 a month, you'll be paying an extra $630 a month towards your principal.
D. You will pay off your loan and be done with it by May 2017.
As for fees and such, they are required by law to provide you with a Good Faith Estimate (GFE). Scrutinize it. Study it. Ask LOTS of questions. Though WFB is a pretty reputable bank, it's your money and your life!
posted by apark at 2:08 PM on November 3, 2010
Response by poster: apark:
Thanks for the number crunching. Your numbers pretty much match mine.
Also, I guess just announced today, QE2 is here:
http://money.cnn.com/2010/11/03/news/economy/fed_decision/?iid=MPM
Can anything more definitive be said now that it is?
posted by allelopath at 2:29 PM on November 3, 2010
Thanks for the number crunching. Your numbers pretty much match mine.
Also, I guess just announced today, QE2 is here:
http://money.cnn.com/2010/11/03/news/economy/fed_decision/?iid=MPM
Can anything more definitive be said now that it is?
posted by allelopath at 2:29 PM on November 3, 2010
Can anything more definitive be said now that it is?
nope
posted by JPD at 2:35 PM on November 3, 2010
nope
posted by JPD at 2:35 PM on November 3, 2010
Response by poster: Just talked to WF again:
No appraisal
No Prepayment penalty
No 3rd party fees
No Closing costs
posted by allelopath at 2:37 PM on November 3, 2010
No appraisal
No Prepayment penalty
No 3rd party fees
No Closing costs
posted by allelopath at 2:37 PM on November 3, 2010
Just talked to WF again:
No appraisal
No Prepayment penalty
No 3rd party fees
No Closing costs
I did this with WF a couple of years ago, and it works just like they say. The tradeoff is that the rate is slightly higher than you could get on the open market, but you are compensated by not having any fees. If you pay at the new amount, they benefit; if you pay at your current amount, you benefit.
posted by Forktine at 5:38 PM on November 3, 2010
No appraisal
No Prepayment penalty
No 3rd party fees
No Closing costs
I did this with WF a couple of years ago, and it works just like they say. The tradeoff is that the rate is slightly higher than you could get on the open market, but you are compensated by not having any fees. If you pay at the new amount, they benefit; if you pay at your current amount, you benefit.
posted by Forktine at 5:38 PM on November 3, 2010
This thread is closed to new comments.
posted by restless_nomad at 10:01 AM on November 3, 2010