Should I refinance? Help with numbers.

[disneysteve]

With the fed cutting rates another 3/4% today, I'm starting to wonder about refinancing yet again, something I thought we were done with.

We owe 99K on our mortgage. We have 20 years left and the APR is 5.875%. We also owe just under 11K on our HEL. That is at 5.99%. So basically, we owe $110,000 total on the house.

It looks like we could get a 15-year fixed with an APR around 5.1% right now, and that may drop lower with today's rate cut.

The HEL payment is $218.01.
The P&I on the mortgage is $697.17.
That makes a total of $915.18.

I just checked on bankrate.com and on a 15-year loan at 5.139%, the payment would be $870. That means we would be saving $45.18/month. That loan lists fees of $999 so it would take 22 months to break even. And we'd pay off the house 5 years sooner. Since we have no plans to move, that sounds like a good deal to me but if someone else wants to run numbers, I'd appreciate it. It is also possible I could find a loan with a better rate or lower fees once I start searching seriously.

We have excellent credit and no other debts at all so no issues there.

One other thing to consider is that I've been making extra payments on the HEL and expect to have it paid off by the end of 2009. That would free up that $218.01/month which could then go toward accelerated mortgage payments or additional investing. Not sure how that would alter the refinancing decision.

[LivingAlmostLarge]

Have you considered a 15 year of the 80% amount and investing the rest of the money? If you can handle a 15 year of the 80% value of your house, and I know you plan on working a bit longer, would it be worth the gamble? Especially if rates drop tomorrow.

[Scanner]

DisneySteve,

I'd do it - I'd only wait to see if Bernacke drops it a bit further. WIth that low of a term left on your HELOC, I don't know that I'd roll it into your re-fin mortgage.

I have heard 1% is usually the magic "break-even" # where it makes sense to re-fi. (for an overly simplistic rule)

Here's my #'s:

$125,000 @ 6% w/ a 25 year mortgage doing equity accelerate for 4 years.
Payment per month: $1028

My guess on the term is 19 years left.

I may drop to a 4.75% mortgage 15 years with 2 points and then equity accelerate again.
Payment per month: $972

LivingLarge,

Now that's a thought - at 4.75% and a tax deduction, tapping our equity and investing it may make sense. It's just that you have to be prepared for a bear market and enduring high mortgage payments through that market.

[LivingAlmostLarge]

I think it would be a nice time to pull out a lump sum for investing. The active rate would be 3.25%. So it would be worth the risk. Plus being fixed for 15 years and timed to finish when you retire, then you invest a bit more aggressively.

Plus why prepay your only cheap money?

[disneysteve]

I think it would be a nice time to pull out a lump sum for investing. The active rate would be 3.25%. So it would be worth the risk. Plus being fixed for 15 years and timed to finish when you retire, then you invest a bit more aggressively.

Plus why prepay your only cheap money?

I'm not sure I've got the cahones to borrow against my home for investing. That's a little beyond my tolerance. I also don't want any more debt.

The reason I prepay my HEL is because I can while still fully funding our Roths, DW's 401K, DD's 529 and some other accounts. We're already about 78% in stocks and I don't want it any higher than that, so I count the HEL prepayments as part of our conservative investments.

[LivingAlmostLarge]

Acceptable. I only suggested because you are smart with money. I know you don't waste it. So because of that I suggest pulling out a lump sum and investing it.

Plus, you have a fixed rate for borrowing, that is tax deductible. Plus you have a large EF, and taxable account. You could keep it in some bond funds or something. And 15 years is a long time frame.

[jIM_Ohio]

I would wait 2-4 months before refinancing. Remember Mortgage rates track the 10 year treasuries, not the fed rate. It will take about a week for today's rate drop to get priced into the 10 year T-bill. Then we should see rates drop. It takes time for the government to actually issue new T Bills (at the lower rate), at that time (when new money is issued), rates will drop.

For $45 (6%) of your current payment, I would wait longer to break even sooner. I am looking to refinance when I save around 12%. I could save $100+/month refinancing now, but would prefer to wait about 2-4 months to pull the trigger. Rates are NOT done dropping.

It will be easier to refinance without the 2nd (HELOC).

[sweeps]

Just to echo what Jim said. Mortgage rates do not track the fed funds rate... they track long-term bond rates. The fed could cut (short term) interest rates, but if bond investors get spooked about inflation, the long term interest rate (and mortgage rates) could go up.

[tripods68]

Steve:

I agree Steve you should refi at 15 years ONLY without HELOC balance. When you pay off your HELOC in 2009, you can reallocate that money towards extra principal payments bringing the 15 years down to 9 to 8 years.

[jIM_Ohio]

Steve:

I agree Steve you should refi at 15 years ONLY without HELOC balance. When you pay off your HELOC in 2009, you can reallocate that money towards extra principal payments bringing the 15 years down to 9 to 8 years.

Please note that if you have a first and second lien, most banks will not refinance the first without seeing the second refinanced too.

This is because if you only refinance the first, that bank is actually second in line if you should undergo foreclosure- because the second mortgage (or HELOC) is older and then takes priority.

Check me on that, but I have been told that by more than one person/ broker.

[tripods68]

Please note that if you have a first and second lien, most banks will not refinance the first without seeing the second refinanced too.

This is because if you only refinance the first, that bank is actually second in line if you should undergo foreclosure- because the second mortgage (or HELOC) is older and then takes priority.

Check me on that, but I have been told that by more than one person/ broker.

I agree somewhat. Now I worked at Wells Fargo and they never like to be 2nd on anything. They like to be the #1 always.

It is important to find out from his bank if this is something that they are willing to do, given his excellent credit history and cash flow. Often times, the bank that usually allow this is the same bank he has the 2nd lien just to keep his business.

[safari]

Another thing to consider is that your mortgage balance is only $99K, which is relatively small. Usually the rates on small mortgages are higher than the quoted rates. So if you're not planning to cash out, you might not be able to get a low rate.

[disneysteve]

Another thing to consider is that your mortgage balance is only $99K, which is relatively small. Usually the rates on small mortgages are higher than the quoted rates. So if you're not planning to cash out, you might not be able to get a low rate.

I was wondering about that. Of course, our original mortgage was only for $113,600 and we did okay then, but that was 14 years ago.

[humandraydel]

The fed could cut (short term) interest rates, but if bond investors get spooked about inflation, the long term interest rate (and mortgage rates) could go up.

Theoretically, yes. But investors are more spooked about stocks right now, so the flight to quality will keep the rates lower than they might otherwise be.

[Mikeee]

The general rule of thumb is if the delta is > 2%.

Also you stay in the house a while. The average American moves every 7 years!