3

I was speaking to a coworker, who says he uses the following strategy:

He refinances his house every 6 months with a +cash out refi (a refi that has negative closing costs). His argument is that although a +cash out refi has a higher rate, that higher rate takes several years to catch up to the money made up front at the refi. He does this every six months. He claims this is a higher NPV than a buy and hold refi.

Is this better financially than just getting a low rate once and sticking with it?

I would really appreciate it if someone could walk me through the NPV calculation on both options.


EDIT: OP here -- thanks for the replies. Let me qualify with some numbers. Let's assume the home is worth $500,000.

Let's say that the cost is $3000, and the points back is $4500. So after all costs, the borrower gets $1500 back.

The interest rate has been increased to account for this, but let's say that the interest rate is 4.5% instead of say 3.75%.

So, down to numbers. An 80% principal loan at an interest rate of 4.5% is $2,026.74 monthly payment. The monthly payment at 3.75% is $1,852.46

So that means that you're paying an extra $2,026.74 - $1,852.46 = $174.28 per month.

After six months, you've paid $174 * 6 = $1045.68.

So in total profit, you've made $1500 from the loan upfront in cash back. You've paid $1045.68 in extra interest. That's a profit of $454.32

So why is this a bad deal? You do this again every 6 months and make a profit. That profit can be invested to grow in an investment vehicle. I could use the $454.32 to pay back principal, for example.

Thanks again for any clarification!

  • 4
    I haven't run the numbers, but this has all the earmarks of "every complex problem has an answer that is simple, obvious, and wrong." Not least because you're increasing the mortgaged amount every time with no indication that the property is appreciating, the interest rate is decreasing, or anything else is happening to justify that nontrivial real cost. Sounds like a great way to go far under water fast. – keshlam Jul 15 '15 at 1:29
  • 4
    This also begs the question - where does real estate go up, every 6 months to pull this stunt over and over? – JTP - Apologise to Monica Jul 15 '15 at 1:38
  • What's the interest rate you are paying when the train stops? – user662852 Jul 16 '15 at 15:15
8

When you refinance, there is cost (guess: around $2000-$3000) to cover lawyers, paperwork, surveys, deed insurance, etc. etc. etc. Someone has to pay that cost, and in the end it will be you.

Even if you get a "no points no cost" loan, the cost is going to be hidden in the interest rate. That's the way transactions with knowledgeable companies works: they do business because they benefit (profit) from it. The expectation is that what they need is different from what you need, so that each of you benefits. But, when it's a primarily cash transaction, you can't both end up with more money.

So, unless value will be created somewhere else from the process (and don't include the +cash, because that ends up tacked onto the principle), this seems like paying for financial entertainment, and there are better ways to do that.

  • Not only yes, buy hell yes. – keshlam Jul 15 '15 at 14:10
  • I'm not certain this is right. If that $4,500 is being added to the loan it's certainly a bad deal but if it's some sort of promotional thing it could make sense, like getting credit cards for the sign-up bonus and then dropping them once you have done what's needed to get that bonus. – Loren Pechtel Jul 16 '15 at 3:59
  • I'd need more details on the plan to know, but my guess is that the only real loss-leaders you're going to get out of a bank are toasters and the occasional luggage. – Daniel Griscom Jul 16 '15 at 11:56

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.