refinance at lower % or accelerate pymts??

Linda marshall

Linda marshall

Level 2 Member
OK, all of you numbers people! Here is a (hopefully) relatively simple warm up math exercise to get your juices flowing this morning!

I'm stuck and need some direction deciding about whether or not it is worth it to refinance our mortgage at a lower rate rather than just accelerate payments and avoid closing costs.

Here are the numbers:
Current loan: 150K 30 year fixed at 4.53%. Currently about $130K and 276 months remain on the loan (**due to accelerated pymts. see below)
Current payments: 1042 (includes $233 property tax + $41 insurance)
** We pay an additional $175/month towards the principal (and have thus paid 7 years since the loan originated 5 years ago) We could pay up to $1300/month.

Possible refinance would be for remaining 130K. 15 year fixed rate with interest rate to somewhere in 3.375%-3.5% range with closing costs ranging from $2500-$3000 which we would NOT roll into the loan.

Home value: around 260-270K
We have been in the home since 2003 and intend to stay for 15-20 years.
Credit score is good-excellent (749ish)

I think those are the numbers required, if there is something I left out, please let me know.
Again, here is the question: Given closing costs, is it worth refinancing at a lower % rate? Or should we keep the loan we have and accelerate payments to get it paid off sooner at the higher % rate?

At this point, I am stuck because I am not a numbers-gal and I also don't entirely trust the online lenders I am in contact with, who of course, assure me that they can "save me a bundle". (Note: I am well read on how to avoid refinance scams, I just don't know which numbers to believe). My SO talked to a retired mortgage broker who quickly calculated that refinancing would only save us $10 a month. I don't know what rate he was factoring in, but I do know that he was rolling the closing costs into the loan amount, which we wouldn't do. When I run the numbers myself (which in all likelihood I am doing incorrectly) I see that there is considerable savings by refinancing (40-50K over life of loan). I'm confused by the discrepancies and hoping that someone is up for the challenge of running these numbers for me and providing some clarification!!

You have my eternal gratitude, AND if you are going to be in Las Vegas in November, I'll buy you a drink for your trouble!!

Thanks!
Linda
 
Saphira2021

Saphira2021

Level 2 Member
Linda
Would you please explain why you would go with a lender that doesn't offer no fee losing? We refinanced 2-3 times and never paid a penny. Granted, this was a few years ago but still. And we got the same great rates as if we went with another lender with closing costs.
 
Linda marshall

Linda marshall

Level 2 Member
That's a good question. My best answer would be that from what I have read, the "no closing fee" loan generally gets made up by lenders in one way or another (no such thing as a free lunch), either through points or an increased interest rate (.25% say). If I am incorrect about that, then I should, and will look into it further, and I appreciate the suggestion. Sounds like it worked out for you. It is so difficult to compare closing costs between lenders. Junk fees abound and getting a "good faith estimate" has proven to be very challenging. Quicken Loans wants a $500 deposit, which I am adamant about not paying, and other lenders are vague about what different fees really cover.
 
Linda marshall

Linda marshall

Level 2 Member
UPDATE: Here is the latest feedback from the one lender who seems at least mostly trustworthy.

Here is the projected new loan. With the lender cost coming down we are looking at a total cost of $1274. Keep in mind I think I can get that reduced even more. So 15 years with a payment of $921.39. Total interest paid would be $35,846.


Here is the scenario if you make extra payment of $175. It’s a little tricky to try and run numbers this way because I am plugging in 23 years and not 30. The scheduled payment line is off because I am trying to base this on the 23 years you have left. Based on the breakdown of your monthly payment you provided I can see that you are paying $767.48 in principle and interest. Add in the $175 and that’s $942.48. Total interest paid in the next 17 years would be $54,365





So it looks like if you want to stay on your current loan you would pay $942.48 a month and $54,365.56 in interest. It would take you about 17 years to pay the home off.


The 15 year loan would have you paying $921.39 a month and $35849.81 in interest. This would pay the home off faster, your monthly payments would be $21 cheaper each month, and you would save $18,516 in interest. All for a grand total of $1,274 in cost.
 
Matt

Matt

Administrator
Staff member
I'm not sure how much better you can do, but the difference between the two rates and the numbers mentioned is similar enough. There should be some mention of one running 15yrs and one running 17 years, so I'd say the advantage is more like $15K in interest, minus closing costs, but still an edge for sure.

In terms of what might not be priced in here - does your state have any taxable events for the Refi? Some do, some don't.. and those that do can have workarounds too, such as here: http://www.nytimes.com/2013/05/26/realestate/reducing-refinancing-expenses.html
 
Saphira2021

Saphira2021

Level 2 Member
Try a smallish local bank for refy. They usually want good business and will eat the fees. Another one to try is to see the ads on which bigish banks want to break into your area. Both strategies worked for us. They both ate the cost and rates were very very reasonable.
I have a spreadsheet (if i can find it) that i created to calculate impact of additional payments on mortgage and impact on the life of outstanding balance. If you have excel i can try to find it and email. It only calculates mortgage not insurance etc. You will need to plug in rate and amount and it will calculate.
 
R

redbirdsj

Level 2 Member
I'm personally all about a 30 year mortgage, but if you decide you want the 15 for the lower rate (recognizing it comes with a higher monthly commitment and thus less flexibility) I think you can do better. Check mtgprofessor.com and run your specs through there. Lenders must be certified to solicit on his site though of course he has an affiliate relationship with them. Compare with cashcall and Sebonic as well.

You're correct that there's "no free lunch" and among competitive offers you will pay the closing costs in either at closing or via a higher rate. The fact is these are FM conforming loans and are sold almost immediately after origination to be securitized into CDOs. So the bank is being compensated via its lender fees and on the sale of the loan but not by holding the loan itself.

Linda marshall said:
UPDATE: Here is the latest feedback from the one lender who seems at least mostly trustworthy.

Here is the projected new loan. With the lender cost coming down we are looking at a total cost of $1274. Keep in mind I think I can get that reduced even more. So 15 years with a payment of $921.39. Total interest paid would be $35,846.


Here is the scenario if you make extra payment of $175. It’s a little tricky to try and run numbers this way because I am plugging in 23 years and not 30. The scheduled payment line is off because I am trying to base this on the 23 years you have left. Based on the breakdown of your monthly payment you provided I can see that you are paying $767.48 in principle and interest. Add in the $175 and that’s $942.48. Total interest paid in the next 17 years would be $54,365





So it looks like if you want to stay on your current loan you would pay $942.48 a month and $54,365.56 in interest. It would take you about 17 years to pay the home off.


The 15 year loan would have you paying $921.39 a month and $35849.81 in interest. This would pay the home off faster, your monthly payments would be $21 cheaper each month, and you would save $18,516 in interest. All for a grand total of $1,274 in cost.
Click to expand...
 
D

Differentplanet

Level 2 Member
Saphira2021 said:
Linda
Would you please explain why you would go with a lender that doesn't offer no fee losing? We refinanced 2-3 times and never paid a penny. Granted, this was a few years ago but still. And we got the same great rates as if we went with another lender with closing costs.
Click to expand...
Where did you get no closing costs? What were your approximate costs for documentation, appraisal fees etc?
 
N

nomadwfs

New Member
Zillow actually has a pretty decent calculator for this specific problem:
http://www.zillow.com/mortgage-calculator/refinance-calculator/

Based on the information you provided - (I assumed worst-case numbers of 3.5% and $3000, respectively.)
Refinancing will not save you money:
Monthly Savings -$170 /mo
New Payment $929
Break Even N/A
Costs $3,000
Lifetime Savings -$6,326

Now, this obviously isn't exact, and it did not let me enter in your additional principal payments.

I have a more broader question for you though. What is your goal? Are you trying to eliminate the mortgage as fast as possible, to remove the psychological pressure of a debt payment every month? Are you trying to most efficiently allocate capital (i.e. pay the least amount of interest possible and free up cashflow for other ventures?) Something else?

Your goal, in my opinion, matters greatly in determining whether or not to refinance. For example, some people prefer the "debt snowball" approach ala Dave Ramsey (http://www.daveramsey.com/blog/get-out-of-debt-with-the-debt-snowball-plan/) where they eliminate individual debts as fast as possible, rather than seeking an efficient use of money.

Since the difference between refinancing and staying with your current arrangement is small, have you considered the oppportunity cost of this venture, both in terms of time and money? You may spend a large amount of time in the process of refinancing the home that may be better used in other pursuits, some making money and some not. Would the extra money you put toward the mortgage be better used elsewhere?
 
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