Math help. Refinance advice

[Calizzy]

A few weeks ago I read the thread about refinance rates and have contacted some local mortgage companies. I have 2 good options and need some help from Mathy types! 

My current mortage is $209k, 27 years left @ 3.75% 

Refi option 1- 20 years @ 3.0% and closing cost of $1139

Refi option 2- 20 years @ 2.5% and closing cost of $3317

 

So, which would you choose. The extra $2178 in closing cost for the 1/2 percent lower rate or not? If I did the math right the lower payment would be $51.50 less than the high one. So dividing the extra closing costs by 51.50, I think the lower interest rate would pay off after 42 months. We hope to be in this house for at least 10 years so hypothetically the lower rate would be worth it. But based on experience, life doesn't always go the way you plan...

 

Also, are rates negotiable? Can I tell lender 1 that lender 2 is offering 2.5% and see if they can give me a better rate?

Edited August 5, 2020 by Calizzy

[Bootsie]

Your calculation gives you a rough estimate of how long it would be before the lower interest rate, higher closing cost option breaks even.  It gives you when you would have been giving the bank the same amount of dollars up to that point, but it actually underestimates the value of the lower interest rate.  After 42 months you have spent the same number of dollars either way, but your mortgage balance would only be about $179,500 with the low rate and about $180,850 with the higher rate.  So, if you were going to move after 42 months (or won the lottery and wanted to pay off your mortgage) you have paid the same amount of dollars but have more equity in the house with the lower rate.  

I was assuming you are financing $209,000--if that was your original loan amount and you are now financing a little bit less, the numbers will be slightly different--but not much. I was also assuming that closing costs are paid upfront and not rolled into financing. 

[sgo95]

Another point to consider is that if you went with option 2 and invested the $51.50 each month at an assumed (low) average rate of return of 4%, you would end up with much more saved with option 2.  For example, if you took 20 years to pay off the mortgage and consistently invested the $51.50, you would have over $14,000 more compared to option 1.

In terms of negotiation, I was able to get the lender to lower fees (give me an extra credit) in March when we refinanced.

Edited August 6, 2020 by sgo95