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!