Another attempt at refinancing falls flat
August 28, 2015
Our interest rate on the mortgage sucks at 4.8%. Because our HOA is engaged in some legal shenanigans and no lender will refinance a property with the exact scenario we’ve got, we weren’t able to refinance when rates bottomed out. My penny-pinching heart bleeds. Yet another reason to thank the HOA. I gave it another go when I found SoFi, a new lender that started out in student loans and recently branched out into mortgages.
I’d forgotten what our break-even number was, so I went searching for a new calculation at the same time. I’ve banked with Citibank for ages so had a look at their rates while I cleared out a checking account. They offered an overly simplistic way of calculating break-even: The typical formula for calculating your break-even point is to divide your refinance closing costs by the amount you’ll save each month with your lower mortgage payment.
For example, if your refinance costs total $5,000 and refinancing will save you $200 a month, it will take you 25 months to break even. If you don’t plan on staying in your house for that long, refinancing might not make most sense in the long run.
That’s shortsighted. Looking at the monthly “savings” misses the point which isn’t just to save a bit per month, it’s to save vast amounts over the life of the loan. And it ignores the fact that in some cases, you can choose to change the life span of the new loan to a shorter one (and probably should) which may cost as much or even more than you’re paying monthly.
That’s the case for us: I’m not going to refinance a 30-year mortgage for a new 30-year mortgage – that’s just going to add to the total interest we’d pay over the life of the loan. I’m looking for a 15 or 20 year fixed rate.
My application was quickly pre-approved but we only got as far as a rate estimate and then stalled. It was looking really good: 2.8% fixed for 15 years.
The break-even calculator cautioned me:
Change in monthly mortgage payment: Additional $29 per month
Um, really? We would happily pay an extra $29 per month to save THIS MUCH over the life of the loan. HAPPILY.
The estimated closing costs, right before I provided documentation, stopped me short though: $10,000. Excuse me?? I shot off an email to them. After several go-arounds, that was revised downward drastically to “only” $3500 give or take, but underwriting said they wouldn’t (sigh) touch our loan for the same reason all the traditional banks wouldn’t.
Drat and blast.
I hadn’t quite started up mentally investing that extra $10,000 a year for the next 15 years that wouldn’t ultimately end up in the bank’s coffers by way of interest but I’d already gotten attached. Can you blame me?