Home Refinance Options - a little advice appreciated (1 Viewer)

[Bobcat10]

I've been approached about Wells Fargo (yes, I know they suck) 3-step express refinance program. No money out of pocket (no closing costs, etc), but instead a slightly higher interest rate.

I have $88k left on my home mortgage. I've paid 12 years into a 30 year loan that still has a 5.875% interest rate (I didn't plan to be here this long, but that's another story, so I have never refinanced in the past). Current monthly P&I payment is $655.

They've offered me these 3 options:

1. Fixed 15, 3.75%, est. monthly P&I $645, saves me $10/month and $29k in the long run

2. Fixed 20, 4.25%, est. monthly P&I $550, saves me $105/month and $13k in the long run

3. Fixed 30, 4.875%, est. monthly P&I $470, saves me $185/month but would cost me $24k more in the long run

There's no chance I'll be in this house for 15 more years, let alone 30. I estimate 2-3 years tops. Is there something I'm not considering when I think option #3 is a no brainer?

 

[johnnycakes]

I've been approached about Wells Fargo (yes, I know they suck) 3-step express refinance program. No money out of pocket (no closing costs, etc), but instead a slightly higher interest rate.

I have $88k left on my home mortgage. I've paid 12 years into a 30 year loan that still has a 5.875% interest rate (I didn't plan to be here this long, but that's another story, so I have never refinanced in the past). Current monthly P&I payment is $655.

They've offered me these 3 options:

1. Fixed 15, 3.75%, est. monthly P&I $645, saves me $10/month and $29k in the long run

2. Fixed 20, 4.25%, est. monthly P&I $550, saves me $105/month and $13k in the long run

3. Fixed 30, 4.875%, est. monthly P&I $470, saves me $185/month but would cost me $24k more in the long run

There's no chance I'll be in this house for 15 more years, let alone 30. I estimate 2-3 years tops. Is there something I'm not considering when I think option #3 is a no brainer?

Well... the payment is lower BUT you are paying a lot more interest than under the 15 year scheme. this means you're paying a lot more principal on the 15 year plan... and when you sell the house, your mortgage would be lower and you would get more back on sale that way than with the 30 year plan. You need to do some PV calculations to see what the PV of the difference in the difference in mortagage balances on sale will be.

 

[gianmarco]

Those rates look horrible. Current rates aren't anywhere near that high. Also, why didn't you refinance during this last year when you have a 5.875% rate and you could have dropped 2+ pts off of that?

 

[RUSF18]

Are you locking yourself into this program because you don't want to pay anything out of pocket? Seems like it would at least be sensible to get a quote from another lender to compare.

And good point made above on getting a sense of what your principal balance would be in a couple years given your current mortgage vs what it would be under option 3.

Unless you're specifically trying to free up the extra cash monthly, seems like option 1 will put more cash in your pocket when you sell while keeping your monthly payments the same.

 

[johnnycakes]

Are you locking yourself into this program because you don't want to pay anything out of pocket? Seems like it would at least be sensible to get a quote from another lender to compare.

And good point made above on getting a sense of what your principal balance would be in a couple years given your current mortgage vs what it would be under option 3.

Interest has a tax benefit, which only makes it a little less expensive... interest is still money gone for good. Money paid on principal is money you get back on sale 100%.

Compare the PV of the difference in principal on sale to the PV of the annuity that is your monthly savings. Whichever is bigger... that's the better answer mathematically.

 

[johnnycakes]

OK, I did some quickie calculations for you.

Assuming $88,700 mortgage @ 15 years, 3.75%, monthly payment $645.05.

After 36 monthly payments you have paid $9,228.18 interest

After 36 monthly payments you have paid $13,993.62 principal

After 36 monthly payments principal balance is $74,706.38

Assuming $88,700 mortgage @ 30 years, 4.875%, monthly payment $469.41.

After 36 monthly payments you have paid $12,679.94 interest

After 36 monthly payments you have paid $4,218.82 principal

After 36 monthly payments principal balance is $84,481.18

When you sell the place, you will get $9,774.80 more back by paying off over 15 years.

Because of the relatively short-term horizon, I'm assuming a modest 1.0% interest for simplicity.

PV of $9,774.80 @ 1% compounded monthly for 36 months... $9,486.03

PV of $175.64 @ 1% compounded monthly for 36 months... $6,226.58

Still think option (3) is the best overall?

To put it another way, you would have to invest $175.64 at 28.21% per month for 36 months to wind up with the same $9,774.80 at the end of it.

 

[Bobcat10]

OK, I did some quickie calculations for you.

Assuming $88,700 mortgage @ 15 years, 3.75%, monthly payment $645.05.

After 36 monthly payments you have paid $9,228.18 interest

After 36 monthly payments you have paid $13,993.62 principal

After 36 monthly payments principal balance is $74,706.38

Assuming $88,700 mortgage @ 30 years, 4.875%, monthly payment $469.41.

After 36 monthly payments you have paid $12,679.94 interest

After 36 monthly payments you have paid $4,218.82 principal

After 36 monthly payments principal balance is $84,481.18

When you sell the place, you will get $9,774.80 more back by paying off over 15 years.

Because of the relatively short-term horizon, I'm assuming a modest 1.0% interest for simplicity.

PV of $9,774.80 @ 1% compounded monthly for 36 months... $9,486.03

PV of $175.64 @ 1% compounded monthly for 36 months... $6,226.58

Still think option (3) is the best overall?

To put it another way, you would have to invest $175.64 at 28.21% per month for 36 months to wind up with the same $9,774.80 at the end of it.

No I don't. Thank you for throwing that together.

 

[johnnycakes]

OK, I did some quickie calculations for you.

Assuming $88,700 mortgage @ 15 years, 3.75%, monthly payment $645.05.

After 36 monthly payments you have paid $9,228.18 interest

After 36 monthly payments you have paid $13,993.62 principal

After 36 monthly payments principal balance is $74,706.38

Assuming $88,700 mortgage @ 30 years, 4.875%, monthly payment $469.41.

After 36 monthly payments you have paid $12,679.94 interest

After 36 monthly payments you have paid $4,218.82 principal

After 36 monthly payments principal balance is $84,481.18

When you sell the place, you will get $9,774.80 more back by paying off over 15 years.

Because of the relatively short-term horizon, I'm assuming a modest 1.0% interest for simplicity.

PV of $9,774.80 @ 1% compounded monthly for 36 months... $9,486.03

PV of $175.64 @ 1% compounded monthly for 36 months... $6,226.58

Still think option (3) is the best overall?

To put it another way, you would have to invest $175.64 at 28.21% per month for 36 months to wind up with the same $9,774.80 at the end of it.

No I don't. Thank you for throwing that together.

no problemo... the office is closed today but I still come in. The $175.64 could be tax-effected to narrow that gap a little, but it won't change the overall result, fwiw.

 

[Chadstroma]

Often on these programs there is a pre-payment penalty for the first couple of years. Double check that since you are expecting to be out in 2-3 years. But as for your question, if you can afford the payments then the shorter term is the best option by far in terms of saving money. If cash flow is more important to you then extend out the term and by the extra cash flow with more cost to you.

 

[acarey50]

Be sure to shop around for rates to make sure you are getting a good deal. Just about everyone offers some form of no cost/fee option.