To refinance or not?
June 30, 2020 1:22 PM Subscribe
What are some good reasons to NOT refinance my house?
I have two quotes from my mortgage broker to refinance my primary (only) residence in Northern California. I have a 30-year fixed at 3.875% Option 1 is refinance 30-year at 2.875%, Option 2 is 30-year at 3.5% an take $100,000 out to do some much-needed improvements. With Option 2, my total monthly outlay (Loan, insurance, taxes) ends up about $200 more per month, which seems pretty great to me. Option 1 obviously ends up saving me more per month.
I'm pretty sure I'm going to do one of these and can't see any downside to Option 2 since $200/month seems completely reasonable and affordable. But I have this nagging feeling that I'm missing something important - that's there's some consideration that I'm overlooking. I felt this way after my first refinance about 6 years ago so maybe it's just my nature. What questions am I neglecting to ask?
I have two quotes from my mortgage broker to refinance my primary (only) residence in Northern California. I have a 30-year fixed at 3.875% Option 1 is refinance 30-year at 2.875%, Option 2 is 30-year at 3.5% an take $100,000 out to do some much-needed improvements. With Option 2, my total monthly outlay (Loan, insurance, taxes) ends up about $200 more per month, which seems pretty great to me. Option 1 obviously ends up saving me more per month.
I'm pretty sure I'm going to do one of these and can't see any downside to Option 2 since $200/month seems completely reasonable and affordable. But I have this nagging feeling that I'm missing something important - that's there's some consideration that I'm overlooking. I felt this way after my first refinance about 6 years ago so maybe it's just my nature. What questions am I neglecting to ask?
Consider that if you take money out, you may be on the hook for capital gains. Look into the tax implications of that before extracting cash from your equity.
posted by straw at 1:32 PM on June 30, 2020
posted by straw at 1:32 PM on June 30, 2020
Remember to consider all fees and charges, especially if you're rolling them into the total (so that you are essentially borrowing on them, too). That may or may not be a problem.
posted by praemunire at 1:32 PM on June 30, 2020 [3 favorites]
posted by praemunire at 1:32 PM on June 30, 2020 [3 favorites]
If you go with Option 1, what are you going to do about those much needed repairs? You aren't comparing the same things here. Is there an option to take out a home equity line of credit for the repairs - depending on the size of your mortgage, it may be worth it pay more for the $100k (maybe a lot more) to save 1% on the rest of your mortgage which is probably many hundreds of thousands of dollars.
That's what we did - the HELOC was variable (a disadvantage) but we only paid interest on the outstanding amount so we only borrowed what we really needed (not having to guess ahead of time) and were able to pay it back far quicker than 30 years (an advantage, especially since it gave us access to emergency money if we needed it later, although we never did)
posted by metahawk at 1:41 PM on June 30, 2020 [7 favorites]
That's what we did - the HELOC was variable (a disadvantage) but we only paid interest on the outstanding amount so we only borrowed what we really needed (not having to guess ahead of time) and were able to pay it back far quicker than 30 years (an advantage, especially since it gave us access to emergency money if we needed it later, although we never did)
posted by metahawk at 1:41 PM on June 30, 2020 [7 favorites]
There's not enough info to answer this question. How much time is remaining on your existing mortgage? You say it's a thirty-year mortgage, but how long have you already been paying? Also, what is your current monthly income (gross or net or both)? What are your current monthly payments?
You've provided fragmentary information, so it's tough to give you any real advice. Plus, it's clear you've already tried to justify Option 2 and are trying to get strangers to rubber-stamp that path.
Also, why are you focusing on "total monthly outlay"? This is the trick car salesmen use to get people to pay more: focus on total monthly outlay. From a personal-finance perspective, total monthly outlay is mostly irrelevant. What you should be more concerned about is your lifetime costs.
posted by jdroth at 2:36 PM on June 30, 2020 [8 favorites]
You've provided fragmentary information, so it's tough to give you any real advice. Plus, it's clear you've already tried to justify Option 2 and are trying to get strangers to rubber-stamp that path.
Also, why are you focusing on "total monthly outlay"? This is the trick car salesmen use to get people to pay more: focus on total monthly outlay. From a personal-finance perspective, total monthly outlay is mostly irrelevant. What you should be more concerned about is your lifetime costs.
posted by jdroth at 2:36 PM on June 30, 2020 [8 favorites]
I'm answering the question in the title of your question.
I'm typing this staring at a really ugly, yet functional, circa-1985 kitchen. We're going to need new windows. I need to fix the deck. The bathrooms are not as bad as the kitchen but don't entirely spark joy, although some paint and new hardware has done wonders.
We put a roof on when we bought the house; we've put in insulation and weather-stripped, we put in new HVAC, and we're putting a new floor (vinyl plank) in the basement.
Over the years that my husband and I have owned both this home and our prior home, we've received a whole lot of refinancing offers, especially as the value of our house has almost tripled over time. We are kind of stick in the muds and we have never "taken advantage" of any of them.
If we were selling, or if we had to have guests that would judge us on our cabinetry, we would want to have done the kitchens and bathrooms, and we actually had saved up a lot towards that, planning to do it in late 2021, when COVID-19 hit. But those kinds of improvements are nice-to-have, not necessary...my countertops hold up my cooking! We laugh and enjoy life at our dowdy table!
In 2 years and I think 7 months, our mortgage will be paid off.
posted by warriorqueen at 2:46 PM on June 30, 2020 [9 favorites]
I'm typing this staring at a really ugly, yet functional, circa-1985 kitchen. We're going to need new windows. I need to fix the deck. The bathrooms are not as bad as the kitchen but don't entirely spark joy, although some paint and new hardware has done wonders.
We put a roof on when we bought the house; we've put in insulation and weather-stripped, we put in new HVAC, and we're putting a new floor (vinyl plank) in the basement.
Over the years that my husband and I have owned both this home and our prior home, we've received a whole lot of refinancing offers, especially as the value of our house has almost tripled over time. We are kind of stick in the muds and we have never "taken advantage" of any of them.
If we were selling, or if we had to have guests that would judge us on our cabinetry, we would want to have done the kitchens and bathrooms, and we actually had saved up a lot towards that, planning to do it in late 2021, when COVID-19 hit. But those kinds of improvements are nice-to-have, not necessary...my countertops hold up my cooking! We laugh and enjoy life at our dowdy table!
In 2 years and I think 7 months, our mortgage will be paid off.
posted by warriorqueen at 2:46 PM on June 30, 2020 [9 favorites]
One downside of refinancing to a 30 year loan, six years into your last 30 year loan, is that you are still early in the amortization curve and so paying way more in interest than in principal.
Running some numbers on an amortization calculator, I'm estimating that the last time you refinanced, the principal was about $340K. Your first payment was about $1000 interest and about $450 principal. Right now, your payments are about $950 interest and 625 principal. If you stayed with this loan, you'd get to the point where interest equals principal in about 6 years.
If you refinance for another 30 year loan at the lower rate, the rate is low enough that you'll *also* hit parity of interest and principal in about six years. If you take the higher rate, that point will be probably 9 years out. If it were me, I'd take the lower rate.
Actually, if it were me, I'd take a lower yet rate and also a shorter term. I am in the middle of refinancing from a loan a lot like yours (3.875%, 22 years left to pay) and am refinancing to a 20 year loan at 3.125. The total principal and interest will be almost exactly the same as my current note but I'll be paying more principal than interest right out of the gate.
posted by Sublimity at 2:48 PM on June 30, 2020 [3 favorites]
Running some numbers on an amortization calculator, I'm estimating that the last time you refinanced, the principal was about $340K. Your first payment was about $1000 interest and about $450 principal. Right now, your payments are about $950 interest and 625 principal. If you stayed with this loan, you'd get to the point where interest equals principal in about 6 years.
If you refinance for another 30 year loan at the lower rate, the rate is low enough that you'll *also* hit parity of interest and principal in about six years. If you take the higher rate, that point will be probably 9 years out. If it were me, I'd take the lower rate.
Actually, if it were me, I'd take a lower yet rate and also a shorter term. I am in the middle of refinancing from a loan a lot like yours (3.875%, 22 years left to pay) and am refinancing to a 20 year loan at 3.125. The total principal and interest will be almost exactly the same as my current note but I'll be paying more principal than interest right out of the gate.
posted by Sublimity at 2:48 PM on June 30, 2020 [3 favorites]
Offhand I wonder about your calculation; 100k at 3.5% for 30 years looks like $450 extra a month *by itself*, *plus* the interest on the original mortgage being more expensive than it would be with option A. Perhaps you're saying it's $200
more than you're currently paying, rather than $200 more than your other refi option (which is presumably a good deal less than you're currently paying)?
So it seems you'd be pocketing a lot every month if you went for the lower rate, and it doesn't stop you getting a (hopefully smaller, since you'll be saving money every month) HELOC in the future when home improvement time comes around, if you can put it off. If you can do it in stages, better still. Without the relative sizes of the $100k you want to pocket and the outstanding balance of your mortgage it's impossible to judge what else might work, but a higher rate HELOC along with the lower rate mortgage certainly *could* be cheaper for you.
posted by How much is that froggie in the window at 6:27 PM on June 30, 2020
more than you're currently paying, rather than $200 more than your other refi option (which is presumably a good deal less than you're currently paying)?
So it seems you'd be pocketing a lot every month if you went for the lower rate, and it doesn't stop you getting a (hopefully smaller, since you'll be saving money every month) HELOC in the future when home improvement time comes around, if you can put it off. If you can do it in stages, better still. Without the relative sizes of the $100k you want to pocket and the outstanding balance of your mortgage it's impossible to judge what else might work, but a higher rate HELOC along with the lower rate mortgage certainly *could* be cheaper for you.
posted by How much is that froggie in the window at 6:27 PM on June 30, 2020
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I'm not saying that's bad. A number of people have a better financial situation by paying a mortgage more or less indefinitely because mortgage rates are so low right now.
posted by saeculorum at 1:29 PM on June 30, 2020 [4 favorites]