Refinance Question

[orthodoc2018]

I'm 99% sure I know the answer BUT...

Bought house last year - 30 year loan with 100% financing of $440k @ 3.75%. Refinancing now to 15 year conventional loan 2.375% and appraisal came in @ 495k.

Options are:
1. Pay down to 80% LTV so bringing 35k toward principal to closing
2. Pay PMI
3. Not refinance or look for a different lender who will allow more than 80% financing.

A couple things, I have the cash to do #1 and also picking a new lender is not ideal as it complicates CEMA to avoid recording taxes in NY.

Thanks!!

[jhwkr542]

Either 1 or 3. Definitely not 2

[Tim]

Just in jest, if you are 99% sure, what is your choice and what would change your mind?
Are you opposed to any option and why?
I think you listed them in order of preference.
Just a wag.

[Peds]

whats the answer cause i dont see it?

[orthodoc2018]

I was thinking #1....

[ENT Doc]

#3 is actually two different choices.

[orthodoc2018]

#3 is actually two different choices.

True....

[ENT Doc]

I'm 99% sure I know the answer BUT...

Bought house last year - 30 year loan with 100% financing of $440k @ 3.75%. Refinancing now to 15 year conventional loan 2.375% and appraisal came in @ 495k.

Options are:
1. Pay down to 80% LTV so bringing 35k toward principal to closing
2. Pay PMI
3. Not refinance or look for a different lender who will allow more than 80% financing.

A couple things, I have the cash to do #1 and also picking a new lender is not ideal as it complicates CEMA to avoid recording taxes in NY.

Thanks!!

See the spreadsheet:

Refinance Decision.xlsx

Best decision IMO looks to be a refinance to lower 30 year rate and paying down principal to get to 80% LTV.

[orthodoc2018]

See the spreadsheet:

[ATTACH]n236953[/ATTACH]

Best decision IMO looks to be a refinance to lower 30 year rate and paying down principal to get to 80% LTV.

Thanks for passing that along - really helpful. Couple questions:

1. So you're basing that decision on the fact that the Rate of Return on Refi is 4.78% vs. the expected investment return of 6% correct?
2. Why 30-year? Is that because you think my rate wouldn't be too much higher than what I'm getting? Just need to correct a couple things in the calculator then - my 15-year refi rate is 2.375% not 2.75%. Also closing costs with lender credits and with using my same title agency as last year total approx $2,000 not $5,000. When I put that in the calculator, it changes the refi rate of return to 5.42% - does that move the needle for you?

Thank you!!

[ENT Doc]

Thanks for passing that along - really helpful. Couple questions:

1. So you're basing that decision on the fact that the Rate of Return on Refi is 4.78% vs. the expected investment return of 6% correct?
2. Why 30-year? Is that because you think my rate wouldn't be too much higher than what I'm getting? Just need to correct a couple things in the calculator then - my 15-year refi rate is 2.375% not 2.75%. Also closing costs with lender credits and with using my same title agency as last year total approx $2,000 not $5,000. When I put that in the calculator, it changes the refi rate of return to 5.42% - does that move the needle for you?

Thank you!!

First, make sure you are just adjusting the tabs in green and but not the bottom most rate. The rate of return at the bottom will turn red or green depending on whether it beats your chosen rate of return in the alternative investment, so don't adjust that rate at the bottom of the first column - it's derived from the cash flow rate of return.

Second, yes sorry the 2.75% was a rate that I had left there when doing a 30 year calculation - forgot to change it back but changed the periods back. So yes, if you adjust things to what you say then your rate of return is 5.42%.

However, if you put in 360 periods (30 year term) and 2.75% APR (you should probably be able to get this when bringing principal to the closing to get to 80% LTV) your rate of return is 14.11%.

Not only is 14.11% annualized rate of return better than 5.42% but it beats the hurdle rate of 6% whereas the 5.42% does not. Your hurdle rate is what you would do with the extra cash flow, or the performance of your alternative investment. I assumed that to be 6% but you can make it whatever you want given your asset allocation assumptions. If you beat the hurdle rate it's a good financial decision. If you don't, it isn't. We have gone 30 year stretches in America with pretty poor stock market returns. Then again, we have gone 30 year periods with great returns. In order for the 5.42% to be a good decision you'd have to assume a relatively poor performing 30 year rate of return in your alternative investment. Assuming an average rate of return or above average rate of return, the 14.11% still wins. Hence, 30 year refi to a lower rate (as low as you can get them....hint, shop around).

[StateOfMyHead]

That is a stellar tool ENT Doc thank you. I closed on a new build 6 months ago and had planed to sit on the 30y term and invest the difference but a 3.24% guaranteed rate of return on a 15y refi sounds attractive in today's climate.

[ENT Doc]

That is a stellar tool ENT Doc thank you. I closed on a new build 6 months ago and had planed to sit on the 30y term and invest the difference but a 3.24% guaranteed rate of return on a 15y refi sounds attractive in today's climate.

May sound attractive today. But you have to look at 30 year returns. And 3.24% is bad, provided you are remotely stock heavy.

[Budgetmaestra]

I’d do #1. But I’m on team “pay off debt ASAP” and also think that if you took a shortcut on home down payment, it’s good to now be catching up to where you need to be. We actually also bought with only 10% down in 2018 and earlier this year we paid down our mortgage mortgage via some large lump sums to be able to do a refi.