Is it really a reason not to refinance?


J

JD

My husband is an electronics design engineer. With that said I can assure you that he analyzes everything. I often tell people he puts the anal in the word. We are currently paying 7.25% interest with an 8%APR. If we were able to refinance at 5.5% interest we would save ourselves about $2000 a year in interest. My husband doesn't want to refinance because of the closing costs (which we would recoup in 18 months) and because right now we get everything we pay in on the house back at the end of the year. Is this really a good reason not to refinance? My argument to my husband is that we would have about $130 in disposable income if we refinanced. I try and tell him nobody lives year to year but month to month. Lucky for us we can actually plan a livelihood for year to year. But not to refinance because of a short-term cost and a bigger check from the government? Can someone explain my husband's logic to me? I say refinance!
 
P

Paul

My husband is an electronics design engineer. With that said I can assure you that he analyzes everything. I often tell people he puts the anal in the word. We are currently paying 7.25% interest with an 8%APR. If we were able to refinance at 5.5% interest we would save ourselves about $2000 a year in interest. My husband doesn't want to refinance because of the closing costs (which we would recoup in 18 months) and because right now we get everything we pay in on the house back at the end of the year.

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What do you mean by "right now we get everything we pay in on the house back at the end of the year"?

How is this possible? At best, you get a tax deduction on the interest and the taxes, but not the principal amount of your payment. Times the tax rate, that's some percentage that you "get back" in reduced taxes, but I can't see how you get it all back.


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Is this really a good reason not to refinance? My argument to my husband is that we would have about $130 in disposable income if we refinanced. I try and tell him nobody lives year to year but month to month. Lucky for us we can actually plan a livelihood for year to year. But not to refinance because of a short-term cost and a bigger check from the government? Can someone explain my husband's logic to me? I say refinance

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The decision to refi your house should be made if, you plan to stay in that house long enough to recoup the closing costs and then some.

The net increase in disposable income (if you went that route) is an additional benefit to consider. You could also consider the shortening of the terms (to maybe 20 years?) so that your payments remain almost equal, yet you are out from under your mortgage in less time (building more equity faster).


7.25 to 5.5........I'd refi in a heartbeat.
 
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J

JD

What do you mean by "right now we get everything we pay in on the house back at the end of the year"?

How is this possible? At best, you get a tax deduction on the interest and the taxes, but not the principal amount of your payment. Times the tax rate, that's some percentage that you "get back" in reduced taxes, but I can't see how you get it all back.

What I was talking about is the interest and property taxes. Let me clarify by saying if we refinanced we would just barely be able to itemize. By just barely I am talking about $500 or $600. If we refinance we are looking at possibly getting $2000 less on our refund check. This one of my husband's contentions.
------------------------------------------------------

Is this really a good reason not to refinance? My argument to my husband is that we would have about $130 in disposable income if we refinanced. I try and tell him nobody lives year to year but month to month. Lucky for us we can actually plan a livelihood for year to year. But not to refinance because of a short-term cost and a bigger check from the government? Can someone explain my husband's logic to me? I say refinance

-------------------------------------------------------

The decision to refi your house should be made if, you plan to stay in that house long enough to recoup the closing costs and then some.

The net increase in disposable income (if you went that route) is an additional benefit to consider. You could also consider the shortening of the terms (to maybe 20 years?) so that your payments remain almost equal, yet you are out from under your mortgage in less time (building more equity faster).


7.25 to 5.5........I'd refi in a heartbeat.

We plan to be in this house about 5-7more years. In the long run I see it better if we refinance because the new disposable income can be put into our current savings account in which we are saving to put 20-30% down on building or buying our dream house. Or at least our permenant home.
 
B

Bob

What do you mean by "right now we get everything we pay in on the house back at the end of the year"?

How is this possible? At best, you get a tax deduction on the interest and the taxes, but not the principal amount of your payment. Times the tax rate, that's some percentage that you "get back" in reduced taxes, but I can't see how you get it all back.

What I was talking about is the interest and property taxes. Let me clarify by saying if we refinanced we would just barely be able to itemize. By just barely I am talking about $500 or $600. If we refinance we are looking at possibly getting $2000 less on our refund check. This one of my husband's contentions.
 
C

Christopher Browne

Oops! "JD said:
My husband is an electronics design engineer. With that said I can
assure you that he analyzes everything. I often tell people he puts
the anal in the word. We are currently paying 7.25% interest with an
8%APR. If we were able to refinance at 5.5% interest we would save
ourselves about $2000 a year in interest. My husband doesn't want to
refinance because of the closing costs (which we would recoup in 18
months) and because right now we get everything we pay in on the
house back at the end of the year. Is this really a good reason not
to refinance? My argument to my husband is that we would have about
$130 in disposable income if we refinanced. I try and tell him
nobody lives year to year but month to month. Lucky for us we can
actually plan a livelihood for year to year.
Reality is that you'd save somewhat less than you expect, in that the
tax effects will diminish the savings somewhat, probably by about 1/2.

Furthermore, there's the question of how the closing costs would
affect taxation. If they have to get capitalized as part of the total
mortgage, that might well be the "deal-killer."
But not to refinance because of a short-term cost and a bigger check
from the government? Can someone explain my husband's logic to me?
I say refinance!
I can't see where the "bigger check from the government" would come
from. If deductible interest payments fall, then your tax bill would
go up, not down.

That may be a worthwhile tradeoff, if you're paying less interest to
the lender, but it's certainly a situation where you have to evaluate
its merits based on the _total_ set of changes in payments...
 
P

Paul

What do you mean by "right now we get everything we pay in on the house back at the end of the year"?

How is this possible? At best, you get a tax deduction on the interest and the taxes, but not the principal amount of your payment. Times the tax rate, that's some percentage that you "get back" in reduced taxes, but I can't see how you get it all back.

What I was talking about is the interest and property taxes. Let me clarify by saying if we refinanced we would just barely be able to itemize. By just barely I am talking about $500 or $600. If we refinance we are looking at possibly getting $2000 less on our refund check. This one of my husband's contentions.
 
J

JD

The amount you can save by refinancing HAS to be greater than the tax savings. It's mathematically impossible to reduce your overall cash outlay on the mortgage and pay more in taxes than the available cash.

In addition, the standard deduction will climb each year, and the deductible interest is reduced each year, until a point is reached that you lose the benefit of itemizing. In that year it may be impossible to get a decent interest rate to reduce your payments.

Now there is an argument for my husband. This makes perfect sense to me. Thanks.
 
G

Greg

JD said:
My husband is an electronics design engineer. With that said I can
assure you that he analyzes everything. I often tell people he puts the
anal in the word. We are currently paying 7.25% interest with an 8%APR.
If we were able to refinance at 5.5% interest we would save ourselves
about $2000 a year in interest. My husband doesn't want to refinance
because of the closing costs (which we would recoup in 18 months) and
because right now we get everything we pay in on the house back at the
end of the year. Is this really a good reason not to refinance? My
argument to my husband is that we would have about $130 in disposable
income if we refinanced. I try and tell him nobody lives year to year
but month to month. Lucky for us we can actually plan a livelihood for
year to year. But not to refinance because of a short-term cost and a
bigger check from the government? Can someone explain my husband's logic
to me? I say refinance!
--
Your husband is not using logic in this case and suffers from money
illusion. Unless you sell before recouping refinancing costs,
refinacing makes sense, the higher the balance and the bigger the rate
differential, the quicker you should do it. The tax impact is lessened
by lower marginal tax rates and the refund check amount can easily be
changed by filing another W-4. Your state taxes may also be affected.

greg
 
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C

Catherine Grant

Plus, add in the fact that you will be paying principal faster at a
lower interest rate, increasing your equity in the house and thereby
increasing the amount you have available to put towards your dream house
in that 5-7 years in the future.

I'm an engineer by training, as well (MIT), and I also say it's a
no-brainer to refinance! Good luck!
Catherine
 

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