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I have a 160,000 loan with a 4.875% interest with a 15 year loan on a home and refinanced about 18 months ago. I got a call from my loan broker who offered me a 4.375% interest rate on a 15 year loan. I would only have to pay $400 for the appraisal. We plan on staying in the home for many years but am unsure if it is worth saving $120 per month. I would like to put the $120 on the principal to pay the loan off .

Do you think it is worth it.

thank you,

momsirish

gmakerley · Posted: Wed Oct 14, 2009 1:04 pm Post subject:

mom, if you spend $400 you save $120 a month, right? now calculate how long it will take to recoup the $400 by dividing it by $120. see? the answer is 3 (and a fraction) months.

it is definitely worth your while to do this transaction, IF what you've been quoted in correct. it may still be worth it even if fees are higher, as long as they're within reason.

jveenstra · Posted: Wed Oct 14, 2009 1:40 pm Post subject: Refinance

The math does not add up for me.

First of all, I have no idea how anyone can refinace with no costs.
Costs are either paid for in the premium from the interest rate and at a rate of 4.375% there is no premium to pay costs.
Costs could be paid for by increasing the mortgage amount. Let's look at that for a second.

You have a 15 year mortgage on $160,000 loan at 4.875%. That is a monthly principal and interest payment of $1,254.
If you have a $160,000 mortgage at 4.375% the monthly principal and interest payment is $1,213. That is only $41 less a month.
You have had the existing loan for 18 months. The balance is now $148,727. If you have a $148,727 mortgage at 4.375% the monthly principal and interest payment is $1,128 and that is $125 less a month than you pay now.
If there are absolutely no costs involved it could be OK. I have never heard of such a thing. I have heard of modifying a mortgage payment with a new balance at the same rate for about $300, but, no appraisal.

If you start over with a new 15 year loan at 4.375% and your monthly payment is $120 less than you pay now, you will pay $204,120 for the next 15 years.
If you continue to pay the $1,254 you have now for the next 162 months you will pay $203,148.

You have to decide if paying $120 a month less is more beneficial to you than paying less but paying more than you would now in total and adding 18 months to the time you still have to pay.

eric1 · Posted: Wed Oct 14, 2009 4:19 pm Post subject:

I agree with John. The costs are probably rolled into the loan amount. The only UP FRONT cost will be the appraisal.

Posted: Thu Oct 15, 2009 5:22 pm Post subject:

I feel the first two answers have a deceptive tinge – i.e., a sales tacit that could be used to talk you into an otherwise uneconomical refinance. Heavy reliance on cash flow can be a legitimate reason for refinance but that doesn’t seem to fit your situation.

First answer implies you are saving money by extending your repayment term. The savings ratio of $400/$120 is due to paying an additional 18 months.

Second answer is more to the point but goes with the “large numbers are impressive” approach. Nothing wrong with the numbers but they would tend to lead one to over estitmate the magnitude of any benefit. Old time value of money argument.

I prefer looking at the alternative in a like-term maturity manner. Payback can then be computed over a relatively short period of time to minimize the effect of discounting future cash flow. Given the assumptions in answer 2, you would pay additional principal plus required P&I for a total of $1,217.51 – a difference of approximately $36/month. Worth it for a cost of $400. Yep but I suspect question is moot since I’d don’t see 4.375% with broker paying all cost except $400. Still with the “real” refinance loan amount (likely including financed closing cost), I’d use a similar approach to make your decision.

gmakerley · Posted: Sat Oct 17, 2009 9:35 am Post subject:

so this comes down to, it appears, the reality of this $400 closing. can they do it, at that rate? it seems illogical, yes; given that rates that low will generally require the payment of points. we can understand fees being waived, etc. but the loan amount is not sufficiently high to afford anyone a decent payday, either.

it's a mystery, mom, but as i stated earlier, if it's really that cheap, i think you ought to spring for it.

shane · Posted: Mon Oct 19, 2009 3:20 pm Post subject:

momsirish, did you get a good faith estimate? Statements like "only have to pay $400" is marketing, you need a good faith estimate to see where the other costs are really going.

Guest

I did get a good faith estimate. The amount of closing costs are $2858.95 and the credit on the bottom of the good faith estimate is the same amount. I do have an a impound acount that they are adding $1434. but looked on my current impound and the amount is about the same give or take $50. looked carefully over the amount and it seems right. can they not tell the truth on the amount to be paid off . I didn't call the bank to clarify that.

gmakerley · Posted: Wed Nov 11, 2009 3:19 pm Post subject:

your question about them not telling the truth on the payoff seems quite off the wall. if they're giving you an estimate, then that's what it is. you ought to have a pretty good idea how close they are on that payoff figure inasmuch as you know how much you owe at present, right?

here's your "out": if you go to closing and you find that the money is funny, go ahead and close. then exercise your right to cancel (if you are truly unhappy) and they'll have to pay you back any funds that they collected from you.

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