Ok, folks. I want your opinions and advice.
The situation is this. My wife and I have been living in our current home for almost 6 years. While the interest rate on our mortgage isn’t astronomical (6.75%), it is still a few points higher than what we could get now if we refinanced it. Also, we have a second mortgage that is at 9%, but is pretty small in comparison to the first mortgage. With rates as low as they are, I though that it might bear looking into refinancing the loans. I had an appointment with our loan officer and based on the data I came home with and some other fiddling I’ve done, here’s what I’ve come up with.
If we refinance, we should be able to get in at around 4.375%. That’s a pretty good drop from the current rates. Because of closing costs, I estimate that it will take about 2.6 years for the refinance to be a positive thing. If we were to sell at any time before that, we’d be losing money if we refinance. Of course, the catch is that we are planning (hoping really) on moving to something a little bit bigger in the next 2 years. Which, if that happens, would mean that the refi would be a bad idea.
If you’re following closely, you’ll notice that there really isn’t a need for advice there. Well, here’s the rub. If we refinance, our overall payment would be reduced by over $100. If I were to take that $100 and use it to pay down a credit card or any other bill, it would be a great help. Also, if I use it to pay a credit card that has 12% interest, I’ll be saving that 12% on that $100 which makes the refi pay off quite a bit faster. *I should note that I am not all that good with math so I don’t know how to figure in the savings on CC interest into the equation. I also don’t know if it’s worth trying to figure in inflation either. If you do, feel free to say so in the comments.
So, here’s your call for advice. What would you do? Would you not refi and just bear with it since you’re planning on moving in 2 years? Or would you do the refi so that you could reduce the payment, payoff your mortgage faster, and use the extra to help pay stuff off? Leave your advice in the comments below!
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I started this blog to share what I know and what I was learning about personal finance. Along the way, I've discovered the Yakezie group, and many other blogging friends.
If you’re planning on moving for sure, I would probably advise to wait. But, if you aren’t sure or think you could stay longer, you have to go for it. I debated the same thing back in my last place. I knew the ‘buyback’ period was about 2.5 years and wasn’t sure if I would stay that long. I ended up being in there 5.5 more years so it worked out great that I went ahead with the re-finance.
I’m jealous that you’re in a position to do that. I would love to re-finance down out of our 5.875% mortgage but we lost the 20% equity cushion so a re-fi would most likely add in PMI, which would wipe out most of the benefit.
And there is the rub, Money Beagle. When we bought the place, we were so certain that we’d only live there a few years before we moved on to something else. So much for that. Whether we’ll be there in 2 years or not, it’s hard to say.
At the moment, I’m tempted to go ahead with it while my wife is thinking we say no.
Have you considered a HELOC instead? You may even be able to get a lower rate, and you could use the money to pay off your higher-rate mortgage and any other higher-rate credit card debt. I believe that closing costs on HELOC’s are a bit lower than on refis as well, though don’t quote me on that.
Of course, the rub there would be that your HELOC payments get added on top of your current mortgage payment, so it would mean somewhat reduced liquidity in the short term, but could vastly improve your long-term situation.
It sounds like you’ve got a tough decision on your hands, but I think I’d go for the refi. If you’ve got the credit card under 2000, you can probably have it paid off before you move, even if you move in 18 months, and you would be “earning” a 12% return on that money. I think the return from paying off the credit card and the lower rate mortgage would probably shave a few months off of your 2.5 years to make back the closing costs, but without some numbers, it’s hard to do math like this. I think I’d go for it if I were you.
I think I’d also go for the refinancing. The downside costs don’t seem too bad, but the upsides are pretty good. You can pay down the CC more quickly, and if you do happen to stay longer than 2 years, then your situation moves from roughly breakeven to positive.
Interesting dilemma. I just locked in my refi a week ago (at 4.6…not quite as lucky as you, but still great).
It sounds like you are paying points to get it that low. Did you try running the number of months payback on a refi with zero due at closing but perhaps a slightly higher rate?
I see ads all the time for No Point/No Closing mortgages. You won’t get the 4-3/8% rate, but if you found one for even 5%, that’s nearly 2%/yr you save in interest, and your breakeven is just for the time you spent signing papers.
I just refinanced from 5.24 to 4.99. I’m ignoring their payment, I plan to pay off in less than the time we had left on this last loan, not looking to stretch it out.
Why leave your house in 2 years?
My thought is to ALWAYS refi if the breakeven in refing is less than 24 months. You’re right at the cusp.
What % are you sure you will be gone in 2 yrs?
Sam
Hmmm, that a tough one. I might even try to stretch myself and buy the bigger house now with the mortgage rates at near a 50 year low…
If you 50/50 on the moving in 2 years. I would refinance now because the interest rate in 2 years could be high, especially if inflation even rears it’s ugly head.
I’ll be honest, we’ve been talking about buying a bigger house to try and capture this low mortgage rate!
Good luck on your choice!!!
OK, maybe this is a stupid question – but why is the rate so high? If you’re planning on selling, why wouldn’t you go for a variable rate? Mine’s at 2.9% right now (just got bumped from 2.6%).
Here’s a table of US historic rates from 1955 to date:
http://www.bankofcanada.ca/pdf/annual_page73_page74.pdf
To be honest, I didn’t realize that rates had fluctuated as much as they have in the past year over year. That makes it a bit more scary I suppose – but as someone said, maybe a heloc is the answer for you since you can take a new rate with you with one of those I think?
Don’t get a home equity loan of credit. Then you remove your equity until it’s paid off. Don’t do it.
We refinanced and got a 4.25 rate 6 years ago. But we knew we were here for the long run and our survey and other documents were still usable, so we had no closing costs.
I would work out all the numbers. Closing costs, gain in lowered interest and your length of mortgage. If the gain is sufficient, then consider it. Otherwise, stop spinning your wheels and keep at the debt.