patrick.net

Sure. 4.25% over 30 years is an average cost of money of $1400/mo.

3.875% comes out to $1300/mo.

So it will take 2-3 years to cover the closing costs.

$15800 earns $26/mo at 2%.

My "average cost of money" calculation is odd but I like it since the future is impossible to model really.

E-man says

Not sure why others are complaining. :o)

:)

Let's assume you refi, but keep paying your old monthly payment on the new mortgage ...
old payment = 430 @ 4.25 = $2,115.34 monthly payment for 30 years
417 @ 3.875 with $2,115.34 monthly payment = 26 years
You will save 4 years
4 years @ $2,115.34 = $101K
101K - 13k = 88K saving
Basically, every dollar of principal you pay into your loan saves you seven dollars
There's no better return for your money
(I'm ignoring lost tax benefit and investment potential of 13k here. I don't think there's all the much tax benefit between the two cases because of the standard deduction. Maybe 8k. As for the investment potential of 13k, that's probably zero 'cause most likely you'll end up spending it.)
I wanted to show this a second way, but for some reason i don't get the exactly the same result ...
430 @ 4.25 = $2,115.34 monthly payment for 30 years = total interest 331k + 430principal = 761 total cost
417 @ 3.875 with $2,115.34 monthly payment = 26 years = total interest 247k + 417principal = 664 total cost
difference is = 97K, so your 13k gets you 97K return.

There's probably one more calculation that needs to be done. If you finish paying off the loan 4 years early, then for those last 4 years you could potentially invest that 2115/month with the prevailing interest rate. If it was 5%, then 2115 invested every month for 4 years with compounding interest leaves you with 112K
(using Excel spreadsheet formula =FV(5%/12, 4*12, -2115, 0, 1) ...
http://www.techonthenet.com/excel/formulas/fv.php )
so interest earned = 112k - 2115*12*4 = 10k

So my guess is that 13K is worth about 95k if you do the refi

FWIW, The refi has the option of a lower monthly payment so you require less emergency fund. This will allow you to pay off principal with spare cash, and by my calculations every dollar of principal you pay off now is effectively worth seven dollars (on the assumption that you would otherwise keep that mortgage for 30 years).
For comparison, if you stuck $1 in the bank at 1% interest it would only be worth $1.35 after 30 years (excel =FV(1%/12, 30*12,0, -1, 1))

Yes, assuming you won't have any trouble paying off that loan.

I like Bob's simple and realistic method.
Bert's method compares future value with present value which probably isn't the best approach - how can we get a good future value 26 or 30 years later of the 13,000 and 2,800 had they been invested? you can try to use similar rates for all calculations, but if so, you might as well make everything present value.

This is all napkin calculation and I didn't really check anything:
Savings:
1. For the 417k portion, you save 0.375% of the principal each year in interest: (4.25%-3.875)*417 = 1,564. Less 25% that you'd already have if this was deductible interest and you're left with 1,173 net gain. This is first year gain from lower interest rate. This will decrease as principal value drops, but for first few years comparison, the difference is small and shouldn't effect result much.
2. For the 13k portion, 4.25%*13,000 = 553. Less 25% = 414. This will also decrease with principal value.
Costs:
1. You spend 2,800, losing 2,800 now and 2,800*r*2/3 per year. 2/3 factor is assuming you pay 33% fed and state taxes. "r" is your potential investment return.
2. You lose extra earning from 13,000 *r*2/3 per year.

so:
1,173+414 per year (decreasing with principal) vs 2,800 + (13,000+2,800)*r*2/3 per year
1,587*y = 2,800 + 10,533*r*y
y(1,587-10,533r)=2,800
y(1-6.6r)=1.8
If your "r" is 0% (money just sit around), you should be even money at about 1.8 years.
If your "r" is 4.25% (same as current interest rate), you break even around 2.5 years.
If your "r" is 10%, you may need ~ 5 years to break even.

I believe bottom line is - will you keep the loan long enough to gain from this transaction?

SF ace says

Slight no for me.

2,800 sunk cost and 13K buydown is too much opportunity lost for such small incremental benefit.

If that 16K is sitting on savings, CD, and other low yield vehicle, then yes. if not, I would not refi on those terms.

make everyday count

We have about 280k sitting in cash. It's our emergency/college/invest in RE opportunity fund. I could send in 13k extra on the next mortgage payment and then do the refi.

StoutFiles says

Yes, assuming you won't have any trouble paying off that loan.

+ Assuming 100K financed property value won't go down to 70K. That 30K loss and what it could have turned into in 30 years? Answer would not make one happy about one's investment. :)

burritos says

We have about 280k sitting in cash.

Take 230K and refi at 3.875. You will save 292K

Proof
Total cost of paying 430K at 4.25 = 30*12*2115 = 761K
Total cost of paying 200K at 3.875 = 113*2115+230K = 469K
(113 is the number of months it will take to payoff 200K @ 3.875 using 2115/month)

The only downside is you lose the earning potential of that 230K for 9 years. I'm curious what you're earning on it at the moment?

bert says

burritos says

We have about 280k sitting in cash.

Take 230K and refi at 3.875. You will save 292K

Proof

Total cost of paying 430K at 4.25 = 30*12*2115 = 761K

Total cost of paying 200K at 3.875 = 113*2115+230K = 469K

(113 is the number of months it will take to payoff 200K @ 3.875 using 2115/month)

The only downside is you lose the earning potential of that 230K for 9 years. I'm curious what you're earning on it at the moment?

It's in an ing checking earning 1.15%. Paying off the mortgage is not a priority for me. Having cash at hand gives me the peace of mind that I have options. What to do though can be dizzying.

You really don't need that much cash doing nothing to have peace of mind. If someone offered you a completely safe investment with 14% annual return (tax free) you'd probably take it right? You'll still have 50K peace of mind. Most people would love to have that amount of emergency fund ... especially with a monthly nut of 940.

bert says

You really don't need that much cash doing nothing to have peace of mind. If someone offered you a completely safe investment with 14% annual return (tax free) you'd probably take it right? You'll still have 50K peace of mind. Most people would love to have that amount of emergency fund ... especially with a monthly nut of 940.

Is 50k an absolute amount that someone should hold in cash? I always felt 10-15% of one's invested assets was a good guideline.

burritos says

Is 50k an absolute amount that someone should hold in cash? I always felt 10-15% of one's invested assets was a good guideline.

I don't think there's any good rule of thumb on this. The most common ranges I've heard for how much cash to keep around range from 6 months of monthly income (or sometimes 6 months of monthly expenses, depending) to zero because you can just use your credit cards as your emergency fund. I think it's more about what you're comfortable with and what your experiences have been.

bert says

If someone offered you a completely safe investment with 14% annual return (tax free) you'd probably take it right?

Sounds sort of like investing in a company that genetically engineers horses into unicorns...

Title is misleading since the 13K is being used to payoff some of the loan.

zzyzzx says

Title is misleading since the 13K is being used to payoff some of the loan.

Huh? It says that. Pay down a 430k loan to 417k. Then get a better rate. Why is that misleadding?