4.5% interest rate and having $4,000 in closing costs added onto our current loan of $338,00 taking it back up to $342,000.
We would basically lose about a year's worth of payments but we would be saving $108.00 per month for 30 years which equals $38,880.00
My wife and I are not seeing eye to eye on doing the streamline and getting our loan moved down from 5% to 4 1/2%. She says "it's not worth it" because we would only be saving $100 per month and losing a whole year's worth of payments and basically starting over. I told her it's nothing to worry about because we still have 29 years to go at 5% and locking in 4 1/2% and starting over is a GOOD THING.
I need some professional advice on this subject so that my wife and I can sit down and make a smart decision.
Thanks!
I forgot to mention that YES we plan to live in this house for the full 30 years and then rent it out thereafter.
Breaking even after 40 months does not seem like a bad situation to me considering I plan to live here for 30 years. Answers
Ghost of Zeuz : (23 hours ago)
Listen to your wife. The payback is 40 months.
Ryan M : (23 hours ago)
If you actually plan on being there for those 29 years, this is a great idea. You basically need to do a break-even calculation to figure out if you plan on being in the house long enough to get to that point. It is like buying a point on your mortgage. Most of the time, if you plan on living in the house more than 7 years..buying the point upfront makes sense. MVD34 : (22 hours ago)
She's actually correct in the big financial picture.
(sorry)
Part of the problem is in the hype surrounding home financing in general. Most of the information is incomplete and some of it is down right wrong.
Old school said you should only refinance once or twice in your LIFETIME. Once if you could cut your interest rate by at least 1% and pay the closing costs in CASH. Once again if you could convert to a 15 year mortgage, lower your interest rate by at least 1% and pay the closing costs in cash.
Short version: refi at 4% or lower APR or a net payback of less than 18 months.
Long version:
(1) Your gut should tell you why paying cash for your closing costs proves it is a good deal for you and rolling it into the mortgage balance is a good thing for the mortgage company (and not you). If it doesn't, think about it seriously right before you go to bed tonight and sleep on it.
(2) You aren't loosing 1 year, you are loosing 4.5 years. Your math needs to be double checked:
29 years minus 30 years equals -1 year.
$4,000 divided by $100 equals 40 months divided by 12 months equals -3.3 years.
Is (1) above becoming clearer yet?
(3) The time value of money isn't constant (this is a professional answer, brace yourself). Ask yourself this question: is a dollar right now the same thing as a promise of a dollar in a year? No, right?
Finance theory says that the value of money received in the future is worth less than money received today. The further out in the future money is received, the less it is worth. 30 years is a long time. I'll spare you the nasty math, but the real value of your $38,800, $100 a month over 30 years is about $18,500.
One way to think about that $18k is to ask yourself how often you think banks are going to do something that doesn't make real money for them (from you). If you think the answer is "not very," then you are correct. Who started this ball rolling? The bank. Who does it benefit? The bank. Why are closing costs $4000? That's about the same as any old ordinary refi. Why isn't it $500? That's a streamline (Answer: because the bank doesn't make money that way. If they are making it, from whom are they making it?)
Another way of thinking about that $18,000 is to consider the 4.3 years you are loosing in the deal. $18,500 divided by 4.3 years equals $4,300. How much is this deal costing you? $4000. How much are you really netting from the deal? $300.
That last bit isn't really "real finance" (The other bits are), but it's a geometric way of perceiving the idea that the bank is offering you this deal primarily for their benefit. They are splitting the benefits in a way that is extremely unfair to you. They get all the profits upfront, you have to wait a long time for yours. The real benefit to you is much, much smaller than it looks on the surface. Blake Dowson : (19 hours ago)
If you need our help with a Streamline Refinance Just let us know by contacting us at our office 916-788-1088
