Home refinance math

hoffse · May 2016

Hi everybody,

H and I are talking about refinancing our house late summer or early fall. Right now we have a 30-year fixed, and I'm thinking of moving to a 15-year fixed at a lower interest rate. We took a higher rate when we bought two years ago because we intended to remodel and then refinance. So this was all part of the plan, but now we're debating which kind of loan we need to be looking at.

I ran some numbers, and a 15-year fixed at current rates would have us paying about $400/month more than we pay now. It would also cost us an additional $2100/year in taxes due to our tax bracket. So I figure our home expenses go up by approx. $6900/year with this. We think we will be in our house another 8 or so years. That $6900/year is roughly $55,200 over 8 years.

But on the flip side, the balance in our loan will be almost exactly $75,000 lower if we stay in the house another 8 years. So when you net those numbers we would upside right by about $20K over 8 years.

On the equity and PMI side of things, I calculate that in a worst case scenario we would be paying PMI for no longer than 13 months if we did a 15-year fixed. This is if our house appraised for exactly the same amount as when we bought it two years ago, and given all of the improvements we have made (and house values going up in our neighborhood), I think that's really unlikely. But for the sake of argument, figure 13 months of PMI with this option.

I am really inclined to do it, even though our payments will be higher. H's car is going to be paid off in September, and we have been sending $700/month to that for the last two years to pay it off early. So come September we would be able to absorb the higher mortgage payment without feeling it, and we would still have some left over to start snowballing our student loans.

FWIW we were originally thinking of doing the entire $700 toward student loans, but I number crunched those also, and they would still be paid off before we moved under the above plan. Also, I'm going to be up for partner in 3.5 years, and all indicators suggest it will happen on time. To be totally frank, I think once that happens we'll spend a year or two picking off the loans with quarterly distributions, and then we will be done. I don't know if the debt snowball will do much for our timeline. That's why I'm thinking it might be better to prioritize a refinance with that extra money once his car is paid off.

What does MM think?

als1982 · May 2016

Do it!!! We went from a 30 to a 15 year in November and dropped our interest rate more than 2%. Easily one of the best financial decisions we've ever made. At this point, we're still planning to double our current payment once the student loans are gone with the hopes of having it paid off in 2020.

smerka · May 2016

Since you are planning to move anyway and are not debt adverse, I think I would use the extra $400 to pay down the principal until you no longer have PMI. Then I would tackle the student loans. If the interest rate is ticking you off, I'd consider refinancing to a different 30 year fixed if the rate was lower and the closing costs were reasonable. In my experience, updating a house (painting, new floors, new fixtures) does not change its value very much. Adding bathrooms or bedrooms does.

hoffse · May 2016

smerka said:

Since you are planning to move anyway and are not debt adverse, I think I would use the extra $400 to pay down the principal until you no longer have PMI. Then I would tackle the student loans. If the interest rate is ticking you off, I'd consider refinancing to a different 30 year fixed if the rate was lower and the closing costs were reasonable. In my experience, updating a house (painting, new floors, new fixtures) does not change its value very much. Adding bathrooms or bedrooms does.

We don't have PMI right now because we took lender-paid, intending to refinance once the big remodeling was done. That's why our interest rate is higher (and yes, it's ticking me off).

Our updating has been some pretty serious remodeling in places - we have added hardwoods throughout where there was carpet, moved walls to create a dining room where there was only a breakfast nook, remodeled two bathrooms and the kitchen. The kitchen was a full gut.

We have had several houses that are smaller than ours sell for $20-$30K more than ours in the last year. A house down the street just sold for $225K more than ours. It actually has the same square footage as ours and same number of beds/baths. That one seemed really overpriced to me when they listed it, but they sold it in a week, so who am I to say. B'ham real estate is really hot right now.

Anyway I think our house will appraise, but if it doesn't we would do regular PMI until we hit the 20% needed. Realistically I think it would only be a few months max.

hoffse · May 2016

als1982 said:

Do it!!! We went from a 30 to a 15 year in November and dropped our interest rate more than 2%. Easily one of the best financial decisions we've ever made. At this point, we're still planning to double our current payment once the student loans are gone with the hopes of having it paid off in 2020.

Yes, that's what we're looking at too.

labro · May 2016

The only other thing I think you could be missing in your calculation in your property tax going up significantly because of a new appraisal. But overall, the savings seem to be worth it plus you're looking at a lot more equity in your home when you sell 8 years down the road. A $400 bump in your monthly mortgage seems to me to be more than manageable too.

brij2006 · May 2016

I'd definitely do it. You're going to be in the house long enough to justify saving the 2% interest, even when you add in closing costs and the PMI for 13 months.

julieanne912 · May 2016

On the PMI front, what would the cost be for you to pay it up front? That might be something to look at too... Either way I don't see how you could lose by refinancing into a 15 year loan.

We're actually starting the refi process right now too because our HOA has been sending us letters about our backyard not being done and we've been in the house for over a year. We were hoping to put it off for one more year since we JUST finished the front yard, but it's looking like that may not be possible with our anal HOA (it's all so silly because over half the neighborhood is still under construction).

Plan is to refi to pull some cash out via a second to get the backyard done (it's just dirt with a concrete stoop right now), and then pay off the second as quickly as possible. Because rates are less, our monthly payment remains about the same even with the second, and once we pay off the second, the first balance will be less than it is right now. But, like you, it all hinges on our appraisal! I ran comps and sent to my lender, and he had his girlfriend (who I also know, used to work with her) look at it and both of us are estimating a value of almost 50k more than we paid, in Feb of last year.. That would be amazing.

smerka · May 2016

Look what I just came across. http://www.clarkhoward.com/why-paying-off-pmi-should-be-a-top-financial?ecmp=clarkhoward_social_facebook_sfp

hoffse · May 2016

julieanne912 said:

On the PMI front, what would the cost be for you to pay it up front? That might be something to look at too... Either way I don't see how you could lose by refinancing into a 15 year loan.

We're actually starting the refi process right now too because our HOA has been sending us letters about our backyard not being done and we've been in the house for over a year. We were hoping to put it off for one more year since we JUST finished the front yard, but it's looking like that may not be possible with our anal HOA (it's all so silly because over half the neighborhood is still under construction).

Plan is to refi to pull some cash out via a second to get the backyard done (it's just dirt with a concrete stoop right now), and then pay off the second as quickly as possible. Because rates are less, our monthly payment remains about the same even with the second, and once we pay off the second, the first balance will be less than it is right now. But, like you, it all hinges on our appraisal! I ran comps and sent to my lender, and he had his girlfriend (who I also know, used to work with her) look at it and both of us are estimating a value of almost 50k more than we paid, in Feb of last year.. That would be amazing.

Yeah I haven't talked to a lender yet. A year ago we were talking about this and our mortgage guy had an appraiser friend of his look at what our neighborhood had done to see what it COULD appraise for. This guy said he could see it appraising for $30K more than we paid for it. It's been a year since then though, and it was just a ballpark.

I have no idea what it would cost for us to pay the PMI (if any) upfront.

H is kind of in favor of doing a 30 year to lower our payments, but in the event our house did not appraise, we would be stuck with PMI for longer. The interest rates on our student loans are higher, so I'm not going to pay the mortgage off early even if we do have PMI because I can deduct all of it (including any PMI), and we can no longer deduct our student loans. I would prefer the PMI just fall off naturally or not be included at all because our house appraises.

Speaking of a cash-out refi, I've toyed with the idea of doing this or opening a HELOC to pay off some student loans so we can get the deduction back. We're in the 28% bracket right now, and I don't want to go any higher. At some point we may have to switch to regular 401(k)s to do it, but I would like to use everything else available to us before we have to do that. Anyway, it depends on what our house appraises for, but I'm probably going to talk to a lender about our options.

brij2006 · May 2016

Will you be close enough with the appraised value, to try some different things to avoid PMI? Now that you have done some updates to the home? Or are the numbers that far off that the PMI will need to be added?

Reason I ask is because you commented that the PMI would only be on there for a short period of time.

If you're close, maybe hold off a bit longer on the refinance and chuck extra money toward the mortgage to get it paid down more so you can avoid PMI. I know it may not be the best idea as far as debt leverage, but just tossing it out there as an option.

hoffse · May 2016

@Brij, I think our house will probably appraise, but it's really hard to know for sure. I really think that the worst case scenario with respect to PMI would have us only paying it for a few months tops. I know that I could very well be over-valuing our house in my head, but we have been watching our neighborhood closely, and house prices are consistently going up whether the house is improved or not. Our house is now (greatly) improved. If the appraisal came back just under the 20% we need, H and I would consider bringing some cash to the table to avoid PMI, but that will also depend on other closing costs, etc.

Deciding to refinance (or not) is one of those pre-TTC items for us, just because it's a huge pain in the butt. I'm willing to wait until the end of the year, but probably not much longer than that because I don't really want the stress of it while we are TTC. I am pro debt-leveraging, but I can't say I enjoy the actual process

cbee817 · May 2016

hoffse said:

Deciding to refinance (or not) is one of those pre-TTC items for us, just because it's a huge pain in the butt. I'm willing to wait until the end of the year, but probably not much longer than that because I don't really want the stress of it while we are TTC. I am pro debt-leveraging, but I can't say I enjoy the actual process

We actually refinanced during my maternity leave with DD#1. It was pretty painless- the worst part was that we were signing everything at the bank and I kept thinking that I need to get home to BF'd the baby!

brij2006 · May 2016

hoffse said:

@Brij, I think our house will probably appraise, but it's really hard to know for sure. I really think that the worst case scenario with respect to PMI would have us only paying it for a few months tops. I know that I could very well be over-valuing our house in my head, but we have been watching our neighborhood closely, and house prices are consistently going up whether the house is improved or not. Our house is now (greatly) improved. If the appraisal came back just under the 20% we need, H and I would consider bringing some cash to the table to avoid PMI, but that will also depend on other closing costs, etc.

Deciding to refinance (or not) is one of those pre-TTC items for us, just because it's a huge pain in the butt. I'm willing to wait until the end of the year, but probably not much longer than that because I don't really want the stress of it while we are TTC. I am pro debt-leveraging, but I can't say I enjoy the actual process

I wouldn't worry too much about refinancing before TTC. You never know how long that's going to take to achieve. We technically had been TTC for 1.5 years when we refinanced our house. Doing so during a pregnancy would have been NBD either.
Don't blame you for not enjoying the debt leveraging process either. That's part of why I'm glad we're no longer doing it. The research and headache for it, is something else.

If you're super close, it's definitely an idea to entertain. PMI is literally throwing that money away. You never get it back. A 2% savings on the interest may make a big difference overall, but if you have to pre-pay a few hundred or more in PMI for a few months till it drops off, then you'll just have to weigh the opportunity cost for that couple of month difference.

AprilZ81 · May 2016

hoffse said:

@Brij, I think our house will probably appraise, but it's really hard to know for sure. I really think that the worst case scenario with respect to PMI would have us only paying it for a few months tops. I know that I could very well be over-valuing our house in my head, but we have been watching our neighborhood closely, and house prices are consistently going up whether the house is improved or not. Our house is now (greatly) improved. If the appraisal came back just under the 20% we need, H and I would consider bringing some cash to the table to avoid PMI, but that will also depend on other closing costs, etc.

Deciding to refinance (or not) is one of those pre-TTC items for us, just because it's a huge pain in the butt. I'm willing to wait until the end of the year, but probably not much longer than that because I don't really want the stress of it while we are TTC. I am pro debt-leveraging, but I can't say I enjoy the actual process

Also, be sure to ask (and verify) if your PMI will fall off or if you will have to refi again to get rid of it. I don't know that there are that many loans where it just falls off at a certain date anymore.

jtmh2012 · May 2016

cbee817 said:

We actually refinanced during my maternity leave with DD#1. It was pretty painless- the worst part was that we were signing everything at the bank and I kept thinking that I need to get home to BF'd the baby!

Our last re-fi was done at our dining room table with the kid in his high chair.

jtmh2012 · May 2016

AprilZ81 said:

Also, be sure to ask (and verify) if your PMI will fall off or if you will have to refi again to get rid of it. I don't know that there are that many loans where it just falls off at a certain date anymore.

And after you ask that, find out if you can get a refund if paid before a certain date. I say this, because the first time I did a re-fi we were told because we paid the loan off (by doing the re-fi) before some date that they were refunding our payments. We just tossed the refund onto the loan balance.

short+sassy · May 2016

labro said:

The only other thing I think you could be missing in your calculation in your property tax going up significantly because of a new appraisal. But overall, the savings seem to be worth it plus you're looking at a lot more equity in your home when you sell 8 years down the road. A $400 bump in your monthly mortgage seems to me to be more than manageable too.

I might be misunderstanding your comment...or maybe it just works differently in different places...but I wouldn't think the tax assessor's office would have access to an appraisal, unless the home owner gave it to them. Which only happens when a recent appraisal is less than what the assessment says.

cbee817 · May 2016

jtmh2012 said:

cbee817 said:

We actually refinanced during my maternity leave with DD#1. It was pretty painless- the worst part was that we were signing everything at the bank and I kept thinking that I need to get home to BF'd the baby!

Our last re-fi was done at our dining room table with the kid in his high chair.

I don't even know if that's an option here, but that's some customer service! I was just happy we didn't have to go downtown like we did when we bought the house- the refi was so much easier and our PMI was removed 15 months after that (the bank did everything- all I did was check the next month to make sure it was gone).

labro · May 2016

short+sassy said:

labro said:

The only other thing I think you could be missing in your calculation in your property tax going up significantly because of a new appraisal. But overall, the savings seem to be worth it plus you're looking at a lot more equity in your home when you sell 8 years down the road. A $400 bump in your monthly mortgage seems to me to be more than manageable too.

I might be misunderstanding your comment...or maybe it just works differently in different places...but I wouldn't think the tax assessor's office would have access to an appraisal, unless the home owner gave it to them. Which only happens when a recent appraisal is less than what the assessment says.

I mean, our property taxes went up significantly when we bought our home so I assume a refinance would be reported in a similar way. I can only assume that the jump was related to a significantly higher assessment because the last time the house had been assessed was when it was built 20 years ago.

julieanne912 · May 2016

labro said:

short+sassy said:

labro said:

The only other thing I think you could be missing in your calculation in your property tax going up significantly because of a new appraisal. But overall, the savings seem to be worth it plus you're looking at a lot more equity in your home when you sell 8 years down the road. A $400 bump in your monthly mortgage seems to me to be more than manageable too.

I might be misunderstanding your comment...or maybe it just works differently in different places...but I wouldn't think the tax assessor's office would have access to an appraisal, unless the home owner gave it to them. Which only happens when a recent appraisal is less than what the assessment says.

I mean, our property taxes went up significantly when we bought our home so I assume a refinance would be reported in a similar way. I can only assume that the jump was related to a significantly higher assessment because the last time the house had been assessed was when it was built 20 years ago.

Not sure how it works there, but here, the county has no knowledge of appraisals. They do have knowledge of actual sales prices, since those are public record. Appraisals aren't, and refinances aren't really an indicator of value since often people refinance their loan for way less than the house is worth.

Your taxes can go up for a variety of reasons, but you are correct in that it probably had to do with your new sales price being of record and they re-assessed based on that. But... they can go up for reasons not related to the value at all.... stuff to do with school fees, bonds, etc.

Also in general, the assessed value isn't all that accurate either. I know the county has our house assessed for about 100k less than we paid for it a bit over a year ago. How they come up with the value is a mystery for the ages, in most areas.

julieanne912 · May 2016

cbee817 said:

jtmh2012 said:

cbee817 said:

We actually refinanced during my maternity leave with DD#1. It was pretty painless- the worst part was that we were signing everything at the bank and I kept thinking that I need to get home to BF'd the baby!

Our last re-fi was done at our dining room table with the kid in his high chair.

I don't even know if that's an option here, but that's some customer service! I was just happy we didn't have to go downtown like we did when we bought the house- the refi was so much easier and our PMI was removed 15 months after that (the bank did everything- all I did was check the next month to make sure it was gone).

That's pretty standard here in CO, to go to wherever is convenient to the borrower. I used to do signings and I pretty much always went to the borrower's house, in the evenings, to do them. I work in escrow/title now and we very rarely do refinance signings at our office or even at the mortgage broker/lender's office, it's pretty much always at their home or work.

So, for next time, ask!

short+sassy · May 2016

julieanne912 said:

labro said:

short+sassy said:

labro said:

The only other thing I think you could be missing in your calculation in your property tax going up significantly because of a new appraisal. But overall, the savings seem to be worth it plus you're looking at a lot more equity in your home when you sell 8 years down the road. A $400 bump in your monthly mortgage seems to me to be more than manageable too.

I might be misunderstanding your comment...or maybe it just works differently in different places...but I wouldn't think the tax assessor's office would have access to an appraisal, unless the home owner gave it to them. Which only happens when a recent appraisal is less than what the assessment says.

I mean, our property taxes went up significantly when we bought our home so I assume a refinance would be reported in a similar way. I can only assume that the jump was related to a significantly higher assessment because the last time the house had been assessed was when it was built 20 years ago.

Not sure how it works there, but here, the county has no knowledge of appraisals. They do have knowledge of actual sales prices, since those are public record. Appraisals aren't, and refinances aren't really an indicator of value since often people refinance their loan for way less than the house is worth.

Your taxes can go up for a variety of reasons, but you are correct in that it probably had to do with your new sales price being of record and they re-assessed based on that. But... they can go up for reasons not related to the value at all.... stuff to do with school fees, bonds, etc.

Also in general, the assessed value isn't all that accurate either. I know the county has our house assessed for about 100k less than we paid for it a bit over a year ago. How they come up with the value is a mystery for the ages, in most areas.

First bolded...so lucky! Not that your taxes were raised of course, but that they normally don't even re-assess properties. My city reassesses each area (rotating) every four years. This year is my area's year and it is going to be a doozy.

Second bolded...love the phrase! I challenged my assessment the first year I owned my home. Bought it in May of that year for $81K. Got my assessment letter in July that my home was valued at something like $220K. The first two weeks in August are dispute time.

I'd already been warned the assessor's office could care less what you bought your house for, even if it was a recent purchase. Because they know better than market forces, I guess (sarcasm). But they will heavily consider appraisals less than six months old. Mine had come in at $135K.

I went in loaded for bear. Had my closing documents, had my appraisal. My first volley. I asked for my assessment to be lowered to...you know...what I had JUST paid for my house. He was unimpressed (as expected) and asked if I had an appraisal.

Second volley. Hand him my 4-month-old appraisal, performed by a 3rd party licensed appraiser...who had actually walked through the house and spent over an hour there, no less. I assumed he would match it. Nope. Assessed my house at $145K, $10K over my appraisal. Granted, that was substantially less than what I had started with but...at the time...their original $220K was a crazy and ridiculously high amount anyway.

jtmh2012 · May 2016

cbee817 said:

jtmh2012 said:

cbee817 said:

We actually refinanced during my maternity leave with DD#1. It was pretty painless- the worst part was that we were signing everything at the bank and I kept thinking that I need to get home to BF'd the baby!

Our last re-fi was done at our dining room table with the kid in his high chair.

I don't even know if that's an option here, but that's some customer service! I was just happy we didn't have to go downtown like we did when we bought the house- the refi was so much easier and our PMI was removed 15 months after that (the bank did everything- all I did was check the next month to make sure it was gone).

My understanding is you can pick your own title company. I never have one I prefer, so I let the bank pick it. The mortgage is through Chase bank, but the nearest branch is 4 hours away. The title company they picked was some national company who just sent a representative out to the house.

short+sassy · May 2016

jtmh2012 said:

cbee817 said:

jtmh2012 said:

cbee817 said:

We actually refinanced during my maternity leave with DD#1. It was pretty painless- the worst part was that we were signing everything at the bank and I kept thinking that I need to get home to BF'd the baby!

Our last re-fi was done at our dining room table with the kid in his high chair.

I don't even know if that's an option here, but that's some customer service! I was just happy we didn't have to go downtown like we did when we bought the house- the refi was so much easier and our PMI was removed 15 months after that (the bank did everything- all I did was check the next month to make sure it was gone).

My understanding is you can pick your own title company. I never have one I prefer, so I let the bank pick it. The mortgage is through Chase bank, but the nearest branch is 4 hours away. The title company they picked was some national company who just sent a representative out to the house.

I also think it's pretty standard in all real estate transactions that the buyer, whether for a purchase or refi, gets to pick their title company.

However, I've never done a refi, so it has been interesting to see it's more typically done at an owner's home than at a title company office or bank.

The title company I use has their offices above a bank, so it's pretty convenient when the mortgager is that same bank also.

jtmh2012 · May 2016

short+sassy said:

jtmh2012 said:

cbee817 said:

jtmh2012 said:

cbee817 said:

We actually refinanced during my maternity leave with DD#1. It was pretty painless- the worst part was that we were signing everything at the bank and I kept thinking that I need to get home to BF'd the baby!

Our last re-fi was done at our dining room table with the kid in his high chair.

I don't even know if that's an option here, but that's some customer service! I was just happy we didn't have to go downtown like we did when we bought the house- the refi was so much easier and our PMI was removed 15 months after that (the bank did everything- all I did was check the next month to make sure it was gone).

My understanding is you can pick your own title company. I never have one I prefer, so I let the bank pick it. The mortgage is through Chase bank, but the nearest branch is 4 hours away. The title company they picked was some national company who just sent a representative out to the house.

I also think it's pretty standard in all real estate transactions that the buyer, whether for a purchase or refi, gets to pick their title company.
However, I've never done a refi, so it has been interesting to see it's more typically done at an owner's home than at a title company office or bank.
The title company I use has their offices above a bank, so it's pretty convenient when the mortgager is that same bank also.

This is the third re-fi I've done and the first one that's been at my house. The other two I've had to go into an office.

julieanne912 · May 2016

short+sassy said:

jtmh2012 said:

cbee817 said:

jtmh2012 said:

cbee817 said:

We actually refinanced during my maternity leave with DD#1. It was pretty painless- the worst part was that we were signing everything at the bank and I kept thinking that I need to get home to BF'd the baby!

Our last re-fi was done at our dining room table with the kid in his high chair.

I don't even know if that's an option here, but that's some customer service! I was just happy we didn't have to go downtown like we did when we bought the house- the refi was so much easier and our PMI was removed 15 months after that (the bank did everything- all I did was check the next month to make sure it was gone).

My understanding is you can pick your own title company. I never have one I prefer, so I let the bank pick it. The mortgage is through Chase bank, but the nearest branch is 4 hours away. The title company they picked was some national company who just sent a representative out to the house.

I also think it's pretty standard in all real estate transactions that the buyer, whether for a purchase or refi, gets to pick their title company.
However, I've never done a refi, so it has been interesting to see it's more typically done at an owner's home than at a title company office or bank.
The title company I use has their offices above a bank, so it's pretty convenient when the mortgager is that same bank also.

Around here it's standard for the seller (ie their agent) to pick the title company. But yup, the borrower for a refi can choose the company, although most seem to just go with the company their mortgage broker/lender recommends. I know for our refi, our mortgage broker doesn't typically use my company (he uses my old one), but we're definitely using my company to do ours because I get a 75% discount on rates, saves about $900.

It's funny though, because at least here in CO, our rates are regulated by the state, so pretty much every company costs the same, so there isn't a big reason to shop around, other than to find a convenient location if you don't want them to come to you.

Home refinance math

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