Time for Another Refi?

5583561290_8714669389_zI’m smack dab in the middle of refinancing my condo. Interest rates have been incredibly low for many years now and are poised to increase. I’ve already taken advantage of them in 2012, securing a fixed-rate mortgage at just 4%. I thought I was all good for the long haul; no more refis for this girl! But several recent factors make me think doing it all over again is worth investigating:

  • Los Angeles home values are consistently on the rise, giving me ample equity to avoid PMI. In my last refi, I just barely missed the 20% threshold and accepted a slightly higher interest rate to avoid a monthly PMI payment.
  • My badass credit score (over 800).
  • Availability of my savings to cover potential costs.
  • Referral to a close friend’s broker (and family member) who’s worked with several of my friends and coworkers with positive results.

In addition to the usual internet research, I consulted my financially savvy friends in this decision. I love that we can talk turkey about real numbers without dancing around in avoidance of revealing anything too money-specific. Here’s what I considered:

How much money will a refi save me?

Upon asking the broker about current offerings, she gave the following two best options for 30-year fixed:

A. 3.75% with no costs, reducing my monthly payment by $117.

B. 3.625% with about $1,200 in costs, reducing my monthly payment by $132.

I briefly considered a 15-year term, but the monthly payment would put me out of my comfort zone. I also think that my money would be better spent maxing out my 401k and Roth IRA, rather than shoveling so much into one asset that I plan to hold for a long time.

Is it worth paying up-front costs to get a lower interest rate?

Math required ahead! Looking at the $132 savings of option B alone, it will take me nine months to recover the $1,200 costs. I can live with that.

But in comparing the two scenarios, it will take me much longer to hit that break-even point. Sure, option B saves me $15 more per month, but is that worth forking over $1,200? That $15 savings becomes $180 a year and $5,400 over 30 years. It would take me 80 months (just over 6.5 years) for the savings to reach the price paid. I’ll likely keep the condo at least until then, but so much of this decision depends on the next question…

Does a refi make sense for my future plans for the property?

Rule of thumb for refinancing is the longer you stay in the home, the higher probability of its financial benefits. I have no intention of ever selling this place. Its got so much going for it, mainly being in a desirable area of the San Fernando Valley. It’s in a completely walk-able neighborhood (somewhat rare for So Cal), is in a great school district, and is close to several big film/television studios.

Ideally, I would like to own this condo for the rest of my life. I bought it from a bank at a low price just as the housing market was collapsing in 2008. Even before this refi, my monthly nut (mortgage, property tax, and HOA dues) is just under the average rental rates in the area. I could continue to live here indefinitely, rent it out for a profit if I decide to move, and even return to it as my low maintenance home in retirement. Of course, this could all change in the future, but I have to base decisions on my current life situation, rather than the immeasurable amount of events that might happen someday.

Short-term savings vs. long-term cost

Saving up to $132 each month sounds awesome, but will starting over with a new 30 years cost me more in the long run? After more math, turns out that it will. Despite the fact that my monthly payment will be reduced, lengthening the term from 26 years to 30 years will cost an additional $12,400 (option A) or $6,800 (option B) over the life of the new mortgage. I found this with a super simple “How much does that loan really cost” calculator.

To counteract this, what if I invest a portion of my monthly savings? With option B, let’s say I add half ($66) into either my Roth IRA or Betterment savings each month. Over 30 years with a modest 4% earnings rate, that would be an additional $39,000 in my nest egg (using this calculator). I feel that I’m anal-retentive enough about my finances to do this consistently.

What’s next?

With all of the above in consideration, I am moving forward with a refi and leaning towards option B. My math may not be perfect or taking every small aspect into consideration, but it makes sense to me. And seeing how it’s my home and money, that’s all that really matters.

As of writing this, my loan has been approved, but I have yet to lock the rate and associated costs. That will be key! My broker is watching the ever-fluctuating market (especially since the recent presidential election) and will let me know when the iron is hot. I hope to land the ideal situation for my awesomely humble home.

(Image: Derek Bruff)

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