Hi! We are first time homebuyers without family to run this stuff by. So thanks in advance.
Current morgage. $263,000. Purchased for 280,000 in 2024 with 3% down. Current rate 7% 30 year.
Offer from current lender is 5.8%, 20 year removal of PMI (163/month) and closing costs of 9900.
The offer from our bank for refinancing lowers our mortgage by $80. We want to own faster and hit 20% equity.
I've seen lower rates, I think lowest was 5% with higher cosong costs (13,000).
We are unsure of what makes sense and what we should be paying attention to.
Refince from 7% to 5.8% at cost of $9900 and removal of PMI. Good deal?
byu/Crazy_Fold355 inpersonalfinance
Posted by Crazy_Fold355
7 Comments
>We are unsure of what makes sense and what we should be paying attention to.
The math. What does the math say about how much you spend over the life of the loan for each option?
Do you have an fha loan?
How much equity do you have currently? Would you be below or above 80% LTV?
Are you financing the closing costs?
a 1.2% interest rate drop plus the removal of PMI will save you about $5k in the first year, so your break even point is around 2 years. so long as you expect to live there for at least 2 more years, its probably a good idea to do this refinance.
I would shop around to see if you can get a similar offer elsewhere with lower closing costs, which would make reaching the break even faster.
Edit: u/RedPandaAlex is correct in bringing up an aspect I had forgot to mention that you need to look at what all is in the closing costs. Any escrow payments that are part of that number would be excluded from the break even analysis, as those are costs you would incur whether you refinanced or not. So it’s possible that your BE here is even shorter than I originally estimated.
What do the closing costs consists of? 9900 seems high and includes some pre-paid interest (points), but does it by any chance include charges for your impound account (taxes and insurance) that you will receive a refund from your previous lender on?
You have to dive into what the closing costs actually entail. There are processing and title fees that you always pay for the service of applying for and closing another loan. There are prepaid items that wind up being a wash in the long-term: you’ll pre-pay to fund your escrow, but you’ll get an escrow refund on your original loan and the escrow is just paying taxes/insurance anyways; and you might need to prepay some interest, but you’d have to pay that anyways on the original loan if you didn’t refinance. Then there’s discount points, where you pay a fee up front for a lower interest rate. I’d be skeptical of that unless you really think you’re going to stay in the house for a while and that rates aren’t ever going to drop significantly in the next 5-10 years. Usually you’re better off putting additional money down rather than buying discount points. There’s almost certainly discount points included with that 5%/$13,000 closing cost offer.
I always do no-cost no-fee refi. In fact I did a negative cost refi last year from 6.125% to 5.375%, with extra $5K credit to help offset interest
Find a mortgage broker and get some more quotes. Those closing costs seem crazy high, even with buy-down credits.
I went from 7.37% down to 5.37% and paid like $3000.