refi or pay more each month

upfoursail · Joined: 27 Jul 2010 Posts: 2 1.73 Dollars($)

We currently owe 233,000 on our home at a rate of 5.5% and are 6 years into a 30 year mortgage. (Original loan was for 260,000) I've been paying an extra $200 each month towards principal to pay it off a bit sooner. Am I better off refinancing to a slightly lower rate (~4.5%) or should I simply continue to pay more each month on what we have?

jveenstra · Posted: Tue Jul 27, 2010 2:30 pm Post subject: Refinance

If you refinance at $233,000 (that would be paying closing costs out of pocket as I did not increase the loan amount to cover costs), the required monthly P&I payment would be $1,180.58. That is $295.67 less than you present required monthly P&I payment.
If you then voluntarily paid what you do now, $1,676.25, the new loan would pay off in 197 months.
The present loan at 5.50% will pay off in 222 months.

By refinancing and paying same as you do now, you save 25 payments of $1,675.25 which is $41,906.

That would seem to be worthwhile. If you simply want to pay less monthly, that could be ok also.
The current loan pays off in 222 months paying $1,676.25 monthly.
If you want to pay off the new loan in same 222 months, pay $1,548.21 monthly which is $128.04 less than you pay now.

Guest

Thanks so much for responding to my question. As a follow-up.... do closing costs factor into how much we'd be saving in the end (or if it makes sense to refinance?) And, what about switching to a 20yr instead of 30 since we're already 6 years into our initial 30 year.

Niicss · Posted: Wed Jul 28, 2010 2:38 am Post subject:

Closing costs play a major role when you plan to refinance the loan. If you have to pay a higher closing cost, it'll take you a longer period to offset it and save money.

jveenstra · Posted: Wed Jul 28, 2010 5:28 am Post subject: Refinance

Costs always play a role. Subtract the costs from the $41,000 in savings and whatever the costs are, it still pays to do it.

20 Year fixed may be same rate or maybe .125% lower. Your savings are about the same as 30 year fixed becasue the rates are the same. All you would be doing is forcing yourself to pay some extra instead of voluntarily doing the extra payments.

Posted: Thu Jul 29, 2010 8:13 am Post subject:

Sit down with the LO who did your original loan. There are just too many “what ifs” to get meaningful blog advice.
Things to consider:

1. When you say “six years into”, my guess is you mean linear time. You obviously have not been paying the $200 extra since day one but better late than never. What is important is you existing remaining term assuming you make no further principal curtailments. This number is 282 and you may wish to use this as the hypothetical loan term to compute comparable payments on the 4.5% alternative.

2. Consider amortization speed to figure earliest break-even point. Mortgages with lower interest rates amortize more rapidly in the earlier years.

You can work the numbers yourself or the LO can assist. If you are going to try on your own, let me give you a starting point assuming $3K in closing cost paid in cash for a new 30-year at 4.5%. Monthly savings on a same-term basis (282 months for amortization comparison) is $136.12. The $3K is cost is recovered after 16 months – 16 x $136.12 plus a $912.88 lower balance with the new refinance mortgage.

jveenstra · Posted: Thu Jul 29, 2010 8:36 am Post subject: Refinance

If you are implying that my blog advice is not meaningful, you are sorely mistaken.
I do not take that amount of time to anwer a question and not be meaningful

Posted: Thu Jul 29, 2010 2:00 pm Post subject:

Hardly. My quick analysis might not apply. Lot of back and forth in a face-to-face is needed to get more details on their objectives, projected occuancy period, liquidity preference, etc. Just too much additional information needed for a blog to give more than generalized methods to review.

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