Mortgage Re-Fi analysis

[Hugh R]

My current mortgage is 4.625% APR with 7 years left. My broker can get me a 3.75% for ten years, which I would make extra payments to keep it at 7 years (when I "retire"). Looking at an amortization calculator like this one Mortgage calculator - Interest.com

If I paid it off in the 10 years I'd pay way too much interest. It would be better to keep my current loan. Basically, I'd keep the same payments and put the "extra" from lower monthly payments into additional payments. I'll shorten the loan by six months, and save about $10,000 in interest. The Re-Fi will cost me about $1,000 for appraisal, loan docs, all that crap.

Bottom line, if you Re-Fi, don't go for another 15, 20 or 30 year loan, the interest you pay up front, go for another loan with the same number of years, or less as your last loan. In the beginning of loans, you pay mostly interest and at the end mostly principal.

[Rick Lee]

When I was in the biz, the average life of a 30 yr. loan was seven years. It's a lot easier to make an extra payment once or twice a year when you have a 30 yr. amortization than when you have a required monthly payment on 10 or 15.

[911Freak]

Well done Hugh

if only more of my clients would embrace that discipline... lead a horse to water....

We'er doing a similarly structured refi for my Dad, rates are just to low to pass on

[flatbutt]

I'm at 5.78 with 18 years left. Worth a re-fi?

[island911]

The mistake people always make is in thinking that they know what future dollars will be worth. --how easy (or difficult) will future dollars come?

I always reflect on the early 80's when I asked an older (successful) guy why he hadn't paid off his home loan. He said; because the loan is only 3.5% (vastly under inflation).

Here we are now - my, how times have changed-- where we are in deflationary times. ...where a few percentage points should be added to your mortgage, to more accurately reflect the cost.

Of course, inflation will likely come back. ... right around the time that boomers all start living off of savings. :-/

[Hugh R]

google mortgage amortization calculator and you'll find plenty of online calculators that you can plug numbers into. Where you get bit is if you go from 18 years back to 30. Look at a 3.75% 15 year and you may well find your payments will be about the same and you cut three years of interest and principal payments, or better of your loan.

[Dueller]

We've thought about refinancing, but the "problem" we have is we only owe about $60K (6 years remaining on a 15yr original note that will be paid off 7 years early if we only pay the actual payment) since we have been agressively paying towards principle. Current rates are about 1.5% lower than our existing mortgage but nobody wants to process a $60K loan despite good credit and large equity...and we don't want to borrow any additional amounts. They're happy to loan $100K or more as the house is now worth $250K but its not worth their time to make a small loan.

So I guess we'll just try to knock it out over the next 3 or so years.

[Rick Lee]

Originally Posted by flatbutt

I'm at 5.78 with 18 years left. Worth a re-fi?

Depends on how long you plan to stay in the house. Figure out your break-even point by dividing your refi costs by monthly payment savings. Whatever that number is, that's how long you have to live there before really saving anything. If you can pull it off with a 15 yr. note and make an extra payment per year (assuming you plan to stay there a while), you'll do well.

[Dueller]

Originally Posted by flatbutt

I'm at 5.78 with 18 years left. Worth a re-fi?

Certainly if you drop to a 15 yr (or even 10 yr) mortgage and drop your interest rates by 1.5% or more...assuming yoou don't have excessive closing costs (say more than $2K).

You could end up with the same payment but paid off 3-8 years earlier.

[Christien]

Originally Posted by Hugh R

In the beginning of loans, you pay mostly interest and at the end mostly principal.

A common misperception. True, it looks staggered, but your payment, whether it's your first or your last, breaks down like this:

1. taxes, if applicable (i.e. a leased vehicle)
2. the interest on whatever your outstanding principal balance is
3. remainder goes to principal

So for example, say we take a $5,000 loan at 5% amortized over 5 years. Payments will be $94.36 per month. The first payment breaks down into $73.53 principal and $20.83 interest. If you take the opening balance of $5000, 5% interest on the year = $250, divide by 12 (for one month's worth of interest) = $20.83.

You always must pay the interest owing each month. Whatever's left over from your total payment amount is applied to principal. Therefore your first payment's interest is exactly the same as your last payment, proportionate to your balance.

My point is that it's not some weird algorithmic calculation cooked up by financial institutions to make as much profit up front as possible. It's simply the cost of borrowing, and if the total payment amount is fixed, then the interest in the early portion of a loan eats up all the payment, because the outstanding balance is so high.

[Hugh R]

As an example, if you had a $100K loan at 5.8 you'd pay about $746/mo for 18 years
A $100K loan at 3.75% would be 727 for 15 years. So 36 x $746 = $26,856 in interest that you wouldn't be paying. Keep the payments the same as the old loan payment and you'd cut even more off of a new 15 year loan.

[Rot 911]

For me it was a no brainer. Right now we are 4 years into our 30 year mortgage @ 6.725. Out of our last monthly payment $250 went on the principle, rest was interest. Using the mortgage calculator for our refinance at 15 years @ 3.875% the first payment will have $677 going towards the principle! Our refinance costs will be around $1200. We will be financially ahead after just 2 months. Our mortgage payment will only be increasing by $96.00 per month.

[Hugh R]

Christien

You're correct of course. I should have said you pay more interest at the beginning of the loan and less at the end. In my situation, the first payment would be around $2,000 interest and the last one is something like $0.71 interest.

[Dantilla]

At only seven years left, the vast majority of the payment is chunking down principle. Your actual interest rate is almost immaterial.

I would stay right where you're at. I wouldn't want to reset the interest clock.

[flatbutt]

Originally Posted by Rick Lee

Depends on how long you plan to stay in the house. Figure out your break-even point by dividing your refi costs by monthly payment savings. Whatever that number is, that's how long you have to live there before really saving anything. If you can pull it off with a 15 yr. note and make an extra payment per year (assuming you plan to stay there a while), you'll do well.

may be worth it then as the next time I plan on moving the only thing going into a box is me. unless I move to AZ soon

[john70t]

Good thread.
Home purchasers can pay 1, 2, or 3 times the price of a property in interest alone. All of that equals time spent working indirectly for the bank.

I think the overall cost should be a factor as well, along with inflation(works in the buyers favor over time), local values, continuance of salary, need for insurance deductions, and desire to remain in the locality.
There are a lot of senarios as to how a piece of RE can affect someone's lifestyle.

[KFC911]

Originally Posted by Dueller

We've thought about refinancing, but the "problem" we have is we only owe about $60K (6 years remaining on a 15yr original note that will be paid off 7 years early if we only pay the actual payment) since we have been agressively paying towards principle. Current rates are about 1.5% lower than our existing mortgage but nobody wants to process a $60K loan despite good credit and large equity...and we don't want to borrow any additional amounts. They're happy to loan $100K or more as the house is now worth $250K but its not worth their time to make a small loan.

So I guess we'll just try to knock it out over the next 3 or so years.

Jim, have you considered a HELOC to pay off that 60K balance? I have one that I've used for purchasing investment properties a couple of times (when rates are dirt cheap, and I knew I could AGGESSIVELY pay it off within three years, even if the variable rate climbed a bit.) My HELOC (0 balance) has been at 3% (through a credit union) for several years now, and I don't foresee the interest rate moving much past that anytime soon. I even used it to purchase my 911 years ago since "my money" was earning a much better return at the time. Caveat...I would never put my primary residence "in play" via a HELOC unless I had my "ducks in a row", but you've been quacking here for a while and I know you're "good" .

[Rick Lee]

Originally Posted by john70t

All of that equals time spent working indirectly for the bank.

No, it equals the cost you pay to borrow a large amount of money. If you hate banks, pay cash or pay rent. Money they make from interest makes it possible to continue lending to others who can't pay cash. When I pay interest for something, I work to earn money to pay the interest that financed my home or lifestyle, not for whomever fronted me the money.

[john70t]

Now Rick, you're just being incorrigible

I disagree.
If the average Joe was actually treated on par with the Goldman Sacks CEOs, he'd be able to borrow from the government at the Discount Rate of 0.150 percent.
Rates On Treasury Bills Mixed At Weekly Auction - CBS News

Instead, the average Joe is forced to pay all the middleman costs of private banks: RE overhead, extra processing, bonuses, bailouts, etc... All of these are not part of the true cost of the loan.

[Rick Lee]

Yeah, and if the queen had balls, she'd be king. Goldman's CEO can pay cash for any house and if he wants to finance, he can still easily put any size down payment on it. To compare someone like that with the average borrower who can barely scrape enough together to qualify for an FHA loan is ridiculous. But left wing nuts like yourself seem to think everyone deserves a house and a mortgage at the same rate as someone who has enough petty cash to pay off any mortgage.