Yesterday I noted that we need to decide whether or not to refinance our mortgage, and I outlined our thought process. It’s not like we’re having any sort of mortgage problems, we really just want to ratchet down our rate. In short, we’ve been presented with an opportunity to do a no-cost refinance of our current mortgage balance from 6.375% to 6.125%. The total savings from this would be around $12.5k. Alternatively, we can pay closing costs and get a rate of 5.875%. In this case, our total payment would drop by $74/month which would increase our overpayment to $224/month (we’re currently overpaying by $150/month). When all is said and done, this approach would reduce our total mortgage cost by roughly $11k, for a total savings of roughly $23k vs. doing nothing.
Of course, that latter value ignores closing costs. We also have to consider that the mortgage savings really come on the back end, and are thus worth less in future dollars. So… If we assume closing costs of $2k (currently just a guess) and project that amount forward 20 years (that’s roughly when our mortgage will be paid off using the above parameters), compounding at a relatively conservation 5% (and ignoring taxes), our closing costs will be worth $5, 306 in future dollars — well below the additional $11k savings.
The other issue at play here is the near-term future of mortgage rates… According to BankRate.com’s Rate Trend Index, the experts say “Don’t rush to lock. Wait for rates to go down.”
This brings up the possibility of a middle-of-the-road scenario in which we do the no-cost refi right now, and then watch rates and possibly pay closing costs for a rock-bottom rate if they fall in the coming month. Here’s my question for all of you…
What would you do?
(a) Sit tight, watch rates, and do nothing for the time being.
(b) Do the no-cost refi to 6.125% right now, and then watch rates to see if it’s worth acting again.
(c) Pay the costs for the 5.875% and then be done with it (unless, of course, rates tumble dramatically).
(d) Something else that I haven’t thought of…
I’m not running this as a standard poll with checkboxes because I want to encourage everyone to share their thoughts beyond simply picking a letter. Don’t be shy! I want to hear your thoughts!