Profile picture for bgubert

I am refinancing and wanted to know if I should I lock on 20 year filxed at 4.25% with 0 closing cos

  • November 17 2010 - Newton
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Answers (24)

That sounds like a really good rate. It is better than a 30 year, but not as high a payment as a 15 and if you are able to make extra payments you can. Always look at the APR to see if there are hidden costs.

If it drops any lower, which I doubt, you can always refinance.
  • November 18 2010
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Look at the cost of the loan. A 4.25 rate with zero closing costs really doesn't tell me how much the loan is costing. They could be rolling points into the loan. Get another quote from another lender and compare Good Faith Estimates.
  • November 18 2010
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Profile picture for mymortgagebrokerjoe
4.25 on a 20 year fixed rate with no lender fees is a good deal. rates are only gonna go up from here, its just a matter of when.
  • November 18 2010
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bgubert, if you are getting a credit = to the total closing costs, then dont waste your time contacting anyone except the lender with the offer, lock it! Rates are moving up again today and that is a fantastic offer.  
  • November 18 2010
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Great Question, Based on interest rates today taking a 20 year term as opposed to a 30 year term is something you really need to think long and hard about. Some food for thought. Can you borrow the money on a 30 year fixed at or near the same rate? If so take he 30 year fixed. 

Example if your payment is 1500 on a 20 year term and 1350.00 on a 30 year term, you would have 150.00 to sock away each month for the next 120 months over a 10 year period you should earn 8-10% if you were to take the savings and place it some sort of safe conservative investment..consult with your financial planner.

Remember, your paying the mortgage back at a 3.06% after tax effective rate assuming a 28% tax bracket and a 4.25% interest rate. So the logic is why not take the cheap money over a longer period of time and save it...in 10 years you will be money ahead. Not to mention as difficult as it is in today's market to pull cash from a home in a pinch...keeping the money in your bank and building cash reserves is never a bad idea. 

Last, at some point housing is going to rebound and we will see our 3-6% apprecition rates. Just remember your home appreciates in value regardless if you owe zero or have a balance. 

  • November 18 2010
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Profile picture for doralgate
Thomas this is very nice thinking but taking a guaranteed rate @ 4.25 % is often a better deal than hopefully earning 8-10% in the market in the next 10 years and that is on to of hopefully having the discipline to save the extra $150 a month or so and earn the 8-10% in interest on it. You know that "bird in the hand vs bird in the bush" thing???
  • November 18 2010
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doralgate, you hit it on the head, the return on the mortgage is totally risk free. Where does one invest today and what is the return for no risk, it isn't 10% or even 8%. The OP needs to act to secure the offer before it's gone.
  • November 18 2010
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I still would like to you based on the OP previous post why he is getting a $500 credit if there are no closing costs.  Something smells fishy especially where rates are at.
  • November 18 2010
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Profile picture for mymortgagebrokerjoe
joe c, when bgubert says no closing costs, i believe he is saying no lender fees. i assume there's still going to be customary closing costs, i.e. taxes, title, and prepaids. also, if he locked in a couple of weeks ago, the credit for the interest rate could be exceeding the origination charge, if any, depends on whether a broker or direct lender. there would be your $500 credit, yet i dont see anywhere on here anything about a $500 credit. i am nearsighted though, so maybe i missed it.
  • November 18 2010
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It was on a different post
  • November 18 2010
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Doralgate..that would be the S&P 500.over a 10 year period over the last 15 years it provides an average rate of return of 8-10% while saving the money is the tough part...the smart money is to take the same or similar rate over a longer period of time. What happens if a job loss occurs, or decrease in income or unexepected expenses occur. 

We don't know the cash reserves of the client and why not take 4.25% money on a 30yr term or 4.375% on a 30 year and have the option to pay it to principal or save it. Once you sign that 20 year note..no going back to a lower payment...would you not agree the flexability is better not to mention the rate of return? The home will appreicate at some point regardless if she owes 200k or zero against it..not sure I understand the logic of the 20 year.

That's like passing up 0.0% over 60 months on a car loan and choosing 36 months at 0.0% becuase the term is shorter?? Pretty sure I'd take the zero over 60 months...

Same rule would apply on 4.25% over 20 vs 30.
 
  • November 18 2010
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Profile picture for doralgate
Uhhhhmmmmm NO....big difference in paying 0% over 3 or 6 years versus paying 4.25% for an additional 10 years on a purchase of the magnitude ($100k, $200k....) of a house.

Btw S&P 500 in Jan 2000 was 1500 and Jan 2010 it was 1170 (a semi random :-~ pick of ten years out of the last 15)....I don't see the return you are pretty much taking as granted. And again I know that is very simplified we are not even yet talking about the discipline it would take to stick to the regiment that you are proposing. Not sure if you can properly back up the 3%-6% per year gain in housing prices either.

Also you don't know anything about the person trying to borrow....maybe, just maybe the have a reason to look at the the 20 year term vs the 30 tear term.  I do on occasion hear rumors that there are still some people that are trying to retire still even with the current economic climate?

And basically you say that if there is a job loss or reduction in income the $150 saved a month by going to a 30year term (your numbers not mine I did not plug them) will make a difference in saving the property? I'm not so sure....the only flexibilty there is is to spend that money on a monthly basis.
  • November 18 2010
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Hey, if that is truely at no closing costs, I'd run to the clsg table as quick as you can.  I don't see that kinda rate/deal available currently so be sure it is a "no closing cost" structured loan and not a "no funds to close" structured loan.  Big difference.  Good luck. 
  • November 18 2010
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Doralgate..the point I'm making is if the interest rate is the same on a 20 year vs a 30 year would it not make sense to take it out over the longer period of time and pay extra to principal every month?
Would it not provide more flexiblity?

If the rates are the same and the client takes out a 30 year mortgage and makes the 20 year payment..pretty sure the total interest paid would be the exact same....so why ink the 20 year loan is flexibility is a bad thing? Does that mean your not preparing for retirment?

As for housing increasing I'm sure your correct...housing will never appreciate ever again...anyway.

Last, if the only reason to go 20 vs. 30 is to avoid the temptation of spending the money...I would suggest that a 30 year loan would be more appropriate. 

As for the S&P 500 remark...clearly you missed the key word Average!
How was 95-2005? What about 96 to 2006 or 2006 to???...we don't have the data yet to do the proper math as far as I can tell...the average is 8-10% Your random period was 2000 to 2010 over the last 15 years? That's not an average of the s&p over the last 15 years that's the last 10 years.

The problem is we only see the future from our past experience, clearly the past 10 years have been hard and it clouded your understanding of my response.



  • November 18 2010
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Profile picture for mymortgagebrokerjoe
hey guys, he just asked if he should lock or not.
 
i can do a 20 year loan today @ 4.25 with no lender fee, and no discount. the borrower would have an adjusted origination fee of $0. shazaam!!
  • November 18 2010
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Profile picture for doralgate
Mr Expert

I very well do get what you are trying to say, as a matter of fact I have a degree in this kind of stuff...I very well understand the benefits of compound interest and even had some fun plugging the numbers for the average US property assuming YOUR unrealistic expected numbers. The problem I have with your quotes is that you make it sound so easy with completely unrealistic numbers.

A. The 20 year rate und 30 year rate are not the same they may be close but not the same

B. You said take the average of 10 years out of a 15 year period of the S&P and I illustrated that the average return for that said 10 year period definitely was nowhere near 8-10%. btw not even a GOOD investment advisors will try to sell you on the historical average of 8-10% anymore try more like 5-7

C. The interest paid is significantly higher if you extend the term by ten years if the rate is 0% like your car loan there is not a difference but at 4.375% (yesterdays rate?) and an extra 10 years the number is significant ($50k on the average US house?)

D. As for your idea of the 30 year being the better option as to avoid spending on random items instead of and asset like a house (and it can definitely be argued that a house is an asset vs an expense) I don't get it. Isn't your whole argument that with the longer term you will now have more disposable income and guess what my theory is that disposable income usually gets disposed off.

So here's the quick and dirty if you are disciplined enough to SAVE  the difference of payments AND invest them on a monthly basis at a HIGH enough return and do this over 30 YEARS you will definitely come out ahead doing so.

Joe you are right we should get back to topic and I leave it upp to you mortgage guys to give the proper advice on locking in a rate....seems like good rates are still out there although trending up....maybe a good time to lock but thats just my opinion and I could be way wrong on that.
  • November 19 2010
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" can do a 20 year loan today @ 4.25 with no lender fee, and no discount. the borrower would have an adjusted origination fee of $0. shazaam!!"

Which is NOT a NO COST loan and you should be ashamed of yourself for pimping it as one. I'm sure you will come back and say that you never said it was a NO COST loan, but you are responding to a thread where that is the topic and you surely are not going out of your way to enlighten anyone to the fact that zero adjusted origination DOES NOT equal zero cost! 

On a GFE, a NO COST (if there is such a thing) loan has a NEGATIVE number for adjusted origination in box A and a ZERO, or better yet, a NEGATIVE number for total estimated settlement costs in Box A + B.

Let's at least set forth to educate and not deceive.
  • November 19 2010
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Profile picture for Therightadvice

Doralgate

I've been following this post for the last day and I have to say you are wrong!  Despite your education and background. The general  assumption's and data you post is inaccurate. The advice the The "Expert" was providing was on point, to consider the 30yr over the 20yr if the rates are similar or the same. A fairly innocent and helpful comment most would agree. Your entire philosophy is built around the very foundation that people can't save money and spend so dump the disposable into a mortgage loan and pay down tax advantaged cheap debt as fast as possible? That's wrong!

What the expert is attempting to say is check out your options think long and hard about a 30 before going with a 20.Frankly, he gave some really good advice. Most people in the mortgage industry would agree with the "Experts" advice and not yours. 

In addition, you keep beating the drum on the extra 10 years? Did you actually read his comment? It simply said if the rate is similar or equal take the longer period as you can always pay the extra to principal and make the 20 year payment. His point why contractually be obligated to the larger payment if something unexpected occurs if the rates are the same or similar. He never suggested spending the savings. His point on the S&P is accurate if you look at the average of 10 years over the last 15 years.

Paying down tax advantaged debt in the 3's you only need to see a rate of return in the 4's so while his example may have been best case the point is spot on, heck you agree it's the better play the problem you have is your assumption people can't save or will just dispose of the cash savings on the 30 year. He never once suggested it just be pissed away. He suggested if you ever have an unexpected expense the money is available in a pinch...like and emergency.  Not to mention if the client does in fact save the difference in payment and does see a 5% rate of return, in 20 years they could write a check for the remaining balance and be money ahead.

The rates are not different on a 20 vs a 30yr. The loan officer makes a little bit more on the 20 year but I doubt those savings are being passed along to the borrower. 

Ultimately Joe is spot on and the "Expert" was providing some worthy advice and good food for thought.




Which they are

  • November 19 2010
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Profile picture for mymortgagebrokerjoe
HugD, put down the hateraide! i did not pimp myself or the loan. i said what i meant, and meant what i said. u are making assumptions, i am not. i am sorry to have to say this, but u are off my christmas card list now.
  • November 19 2010
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Profile picture for doralgate
I think we all agree IF.....

I was just pointing out that it is not as easy as he makes it out to be and that he is using very rosy assumptions....

Sorry I'm a pessimist if it comes to this countries savings rate as well but if you look at history you you will see that it has pretty steadily declined since the 1970's....so yes I'm sorry I don't thik the country as a whole is a bunch of savers and that is what your whole theory is based on.

I'm not saying that this is not a great option for the few that are capable to stick to their plan for 30 years but....it will be harder than made out to be.
  • November 19 2010
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Profile picture for doralgate
Oh yeah....here is some more epssimistic news....and again this is just my opinion but the mortgage debt will SOONER than later NOT be tax advantaged anymore.
  • November 19 2010
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Profile picture for Therightadvice
Agreed!
  • November 19 2010
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Overall, sounds like a great deal. Here's some additional "food for thought" For those who can afford the higher payment, the 15-year mortgage builds equity much more rapidly than a 30, reflecting both the shorter term and a lower interest rate. Many borrowers who take a 30 and make extra payments, would have done better with a 15. Those who take a 30 to invest the cash flow difference have to earn a high return to make it pay, or have to be discipled enough to follow through with the extra principal payments. So let me explain the 15 and 30 year, and then let's talk about the 20 year.

Reasoning: Longer Terms Reduce Payments, Shorter Terms Increase Wealth.

Essentially, you're asking, "We can afford the payment with a 15-year mortgage at 6.75%, but the 30-year at 7% will give us more flexibility. What do you think?"

 Borrowers who have the luxury of choosing between 30 and 15-year terms must decide whether they are payment-minimizers or wealth-maximizers. The first group is concerned mainly with the present, the second with the future.

 The mortgage payment on a $100,000 30-year loan at 7% is $665 while on a 15-year loan at 6.75% it is $885. The lower payment on the 30 is certainly attractive.

 On the other hand, after 5 years the borrower who took out the 15-year loan has repaid $22,933 while the borrower who took out the 30 has repaid only $5,868. That amounts to a difference in wealth accumulation of $17,065. To me, that's even more attractive; I'm a wealth-maximizer.

So in sum, a 20 year loan usually has the same interest rate as a 30 year, and the 15 year is a lower rate. However, many people lack the ability to pay on a 15 year loan consistently month after month. So ideally, that is the right mortgage that everyone should get. However,some people feel that if they get a 30 year and then pay it like a 15 year, they have the extra flexibility of a lower REQUIRED payment, and the ability to add money as needed. It turns out to be false. They may think that they will have this possibility and discipline, but life happens, other bills come along, like credit cards and car loans, and people simply don't follow through.

So that's where the 20 year is a good compromise. It's close enough to a 15 year in terms of equity build-up, but it's longer term enough that the monthly payment is closer to a 30 year. It's the "compromise mortgage", offering some of the smaller monthly payment of a 30 year, and the discipline that a 15 year would normally require. 

In terms of estimating numbers, here's a rough rule of thumb that works, at any interest rate. I will use as an example a $1,000 per month P&I payment (not counting escrowed items like insurance and property taxes)

* If you are paying $1,000/month on a 30yr fixed, doubling the payment will pay the loan off in 10 years; i.e: add a $1,000/month 
* If you are paying $1,000/month on a 30yr fixed, half of the double, will  pay the loan off in 15 years; i.e: add a $ 500/month 
* If you are paying $1,000/month on a 30yr fixed, 1/4th  of the double, will  pay the loan off in 20 years; i.e: add a $ 250/month

So essentially, a 20 year is the best of both worlds: the smaller monthly payment of a 30 year, and the faster equity build-up of a 15 year. It's the compromise loan that is often overlooked, but is a good logical choice.

  • June 19
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Profile picture for CA Direct Lending
And where did paying all this extra principle and getting a shorter-term mortgage with a higher payment get these people when they lost their jobs?  It got them homeless. 

Of all the mortgages out there now and the ones we used to have every single one of them required a job.  If your advice is taken and extra cash is given to the bank to pay down extra principle, or they take a shorter-term mortgage with a higher payment to pay down principle faster because "life happens", well, life certainly happened to a lot of people in the past few years. 

If they were advised to put less down, keep more in the bank, create a separate loan payoff fund that they were in control of, then many more people could have held on to their homes longer or weathered a layoff longer. 

A home is not an investment.  If it is, let's look at it the way other investments are evaluated based on liquidity, safety and rate of return.

1.  Home equity is not very liquid if you have no job.  Your money can be trapped in your home with no way to prove to the bank you can repay the loan.

2.  A home is not a very safe investment since values can decline.  I think we've all seen this recently, everywhere.

3.  And a home does not provide ANY rate of return on equity.  Equity is created by either putting after-tax dollars into the home or by the value of the home increasing. 

Keeping your money in your own account where you control it whether you have a job or not, needing no bank's permission to access it when you need it is the safest place to keep it. 

If you have a separate side fund to pay off your home, over time it will grow with interest and as you add to it.  When the balance eventually reaches your mortgage balance, you can pay off your home if you choose.

When life happens along the way, YOU are in control of your money to take care of those things in life that always seem to happen.
  • June 20
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