lukestein’s Twitter Archive—№ 2,948

DMs with a friend considering a straightforward refinance of his fixed-rate mortgage → A short thread on the decision process Note I'm mainly focused on NPV, not the (almost certain) possibility that you also face cash-flow or behavioral constraints 1/7 @lukestein/1135956576290742272
Permalink On twitter.com ♻️ 4 Retweets ❤️ 5 Favorites 2019 Jun 5 Mood +4 🙂

…in reply to @lukestein
Five key variables; start with three rates (1) Rᵒˡᵈ existing mortgage rate (2) Rⁿᵉʷ refinance rate (3) R opportunity cost (i.e., risk-adjusted return you think you’d earn on money not putting towards your mortgage) After-tax rates (1–2 mortgage interest and 3 investment) 2/7
Permalink On twitter.com ♻️ 4 Retweets ❤️ 1 Favorite 2019 Jun 5 Mood +3 🙂

…in reply to @lukestein
🤑 If Rⁿ≪Rᵒ, you almost¹ always want to refinance “≪” rather than “<“ to account for the significant fixed cost of refinancing² 3/7 ¹Might not want to refinance into even a low-rate short-term mortgage if you have a long time left on your old one and R is sufficiently high
On twitter.com ♻️ 4 Retweets 2019 Jun 5 Mood +1 🙂

…in reply to @lukestein
²Figuring out how much rate reduction you need to cover fixed costs nontrivial; you always have (American) option to refi/refi again later. Definitely DON’T make common mistake of calculating “break-even period” by dividing closing costs by the difference in monthly payments. 4/7
Permalink On twitter.com ♻️ 4 Retweets 2019 Jun 5 Mood -2 🙁

…in reply to @lukestein
If Rⁿ>Rᵒ, the only reason you’d want to refinance (at a higher rate!) is for a term extension; i.e., if Nⁿᵉʷ>Nᵒˡᵈ where (4) Nᵒˡᵈ time remaining on existing mortgage. (5) Nⁿᵉʷ length of refinanced mortgage. 🤑 Do you want a term extension? It depends: 5/7
Permalink On twitter.com ♻️ 4 Retweets 2019 Jun 5 Mood +2 🙂

…in reply to @lukestein
Aside from cash-flow reasons, you may want a term extension if you think you can do better investing in markets (or paying down debt) than in your mortgage;³ i.e., if R>Rⁿ Can justify bigger rate increase Rⁿ>Rᵒ as Nⁿ≫Nᵒ AND R≫Rⁿ 6/7 ³I'm assuming no prepayment penalties
Permalink On twitter.com ♻️ 4 Retweets 2019 Jun 5 Mood +1 🙂

…in reply to @lukestein
Summary: Refinance if (a) You can lower your rate enough to cover fixed costs (without having to shorten your term too much), OR (b) You really want a term extension to relax cash-flow constraints or in order to invest outside your mortgage Also, don’t ignore ARMs or taxes. 7/7
Permalink On twitter.com ♻️ 5 Retweets ❤️ 2 Favorites 2019 Jun 5 Mood 0