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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: Spekulatius who wrote (14938)11/9/2003 1:17:03 PM
From: GraceZRead Replies (1) of 306849
 
You must live in a state where they aren't required to break out the true cost of your loan. The cost was the additional 1/4 point in interest. They apparently covered those expenses which exist in every refinancing in exchange for that extra 1/4 point.

On a 300k 15 year mortgage the difference can seen by figuring the interest expense on the first five years as well as over the life of the loan. With 5.125 you would pay $67,741.12 interest in the first five years, on a 5.375 you would pay $71,205 first five years a difference of $3464.00 for the higher rate. The difference is slightly higher for a 30 year loan in the first five years and significantly higher over the life of the loan.

Now let's say you instead opted for the 5.125 with the $1500 up front cost. The real difference can be expressed in what you would have received in interest on that $1500 during those first five years as opposed to what you paid in extra interest. I find most people are getting less than 1% on their bank funds now which is less than the inflation rate and a negative yield once taxes are figured. Now of course, the interest payment is deductible so let's reduce it by the marginal rate of 33% and you get a real cost (in the first five years) of your refi at around $2320 (or $2494 if you are in the 28% marginal bracket). If you keep the loan longer than 5 years the real difference is far more unless you can get better than the 1% taxable savings rate.

The way I figure it, I can always do better than the 5.375 rate over the lifetime of the loan even with taxes and inflation so I would have done what you did, opt for the slightly higher rate for no up front money. For someone who has a bunch of money sitting in a MM fund making less than 1% taxable and who will keep the loan for the full term, it makes more sense to pay up front to get the lower rate.
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