Monday, January 5, 2009

Thoughts On Refinancing

The lady at the bank, while looking at my account, mentioned that interest rates are almost a percentage point lower than my rate of 5.875%. She wanted to know if I wanted someone to call me to discuss refinancing. I said ok because I wanted to hear the details. They haven't called yet but I looked on the Chase website and found a refinance estimator. I have approximately $54,000 left on my loan and under 10 years to pay. My payment is $620.

Here are 2 of my options:

15yr loan at 5%
1 Point
Closing costs: $2,871
New payment: $427

30yr loan at 4.875%
2 Points
Closing Costs: $3,408
New payment: $334

I plugged these numbers in to my mortgage repayment plan and I didn't come out ahead at all. Maybe I am doing something wrong. I think the 15 year loan costs will take 15 months to pay back and the 30 year loan fees will take 10 months. I plan to pay off my mortgage in 2 years or less so I guess there isn't enough time to recoup the savings. If refinancing isn't going to help me significantly, it isn't worth the trouble. If I wanted to invest my money instead of paying down my mortgage this would be an option. Oh, and this scenario presupposes that I have moved back in to my house and it is my primary residence. Mortgage rates on rental property are around 7%.


Over the Cubicle Wall said...


If you save 1% on your annual rate, for a loan of $54,000 you would save $540 a year in finance charges. Divide $540 into your closing costs, and you get the number of years to payback.

For a 1% savings in rate, unless your closing costs are less than the 2 years you plan to pay it back X $540 ($1,080), it doesn't make sense to do it in your case.

Of course, with your accelerated payback schedule, the interest you pay will be less because your ammoritization schedule is based on less principal after each extra payment. So, your savings would be even less.

The great news is two years from now it will be a moot subject!

Anonymous said...

over the cubicle wall.

nice try, but no.

That is not how interest savings is calculated. You don't simply take one percent of the loan amount an presto, there is your savings.

mortgage ammoritization is complex and interest charges decline as the loan progresses.

The example woul save approximately $400 per year, not $540.

Sallie's Niece said...

I'm really bad at math but I think you're right - that since you're gonna be rid of the mortgage in two years it doesn't make sense to refinance right now. But, hey, at least it's an option if your plans change (probably not likely).

Daizy said...

Why would I not take the difference between my current payment and my new payment $620-$427= $193 then divide my closing costs by that number? $2871/$193= 15 months? Does that not work? I also forgot to add the difference in to my spreadsheet. After 15 months I would be able to contribute $193 more a month.

Daizy said...

Oh, and a 15yr loan would extend the loan period so that lowers the payments too. Too many factors. I am bad at math too.

Over the Cubicle Wall said...

Anon - you are right that it declines as more of the principal is paid off, so yes, the second year would be even less savings. I didn't cover that in the calcs.

Mortgages are based on simple interest and your rate tells you how much interest you will pay as a percentage of the remaining principlel each year. Is this correct, or am I missing something else?

Over the Cubicle Wall said...

Oh, and I like your way better Daizy.

Daizy said...

Over the that a nice way of saying I am totally off-base?

Lizzie @ her homeworld said...

Hmm, I am going to have to go with 'dont bother' here. Are you still a landlord or did you finally get your house back?


Sharon S said...

Hi there-hope you make the right decision, I'm not clued up enough to give advice on this-good luck!

Anonymous said...

A point is a full percentage point of interest charged on the full balance of your loan at the time of refinancing. You will actually end up paying MORE in interest the first year if you refinance under both scenarios, assuming you plan to pay off your loan in less than two years. That's because your balance is dropping so quickly! Don't refinance. You will not recoup your costs in just two years.

Daizy said...

Hi Lizzie, I'm keeping my fingers crossed that my house will be returned to me tomorrow!

Hi there Sharon Rose, obviously, I don't know what I am talking about either! But it is still nice to know I could lower my payment if I wanted to.

Hello Big Sis, thanks for the comment:) Guess I'll just keep on with my plan then.