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I am in my 60s', owe about $102000 on my home (current value about $155K) and have about 11.5 years to go at 5.25%. I also have about $50,000 sitting in my savings account at about 1% interest rate. I am wondering if
1. it makes sense to re-finance the house at 3.4% over 10 years with a closing cost of about $2500?
2. Simply pay $50,000 towards principal and reduce the interest and time to pay off? This would mean keeping the interest rate at 5.25%
3. Get an ARM?
I just do not know what to do but feel it is silly to pay 5.25% interest while storing $50K in my savings at 1%.
What do yuou recommend?
I am in my 60s', owe about $102000 on my home (current value about $155K) and have about 11.5 years to go at 5.25%. I also have about $50,000 sitting in my savings account at about 1% interest rate. I am wondering if
1. it makes sense to re-finance the house at 3.4% over 10 years with a closing cost of about $2500?
2. Simply pay $50,000 towards principal and reduce the interest and time to pay off? This would mean keeping the interest rate at 5.25%
3. Get an ARM?
I just do not know what to do but feel it is silly to pay 5.25% interest while storing $50K in my savings at 1%.
What do yuou recommend?
At your age - my advice is not to do it....
Need more information.....How long had you had your current loan? What was the starting balance? What is your current payment? Other than the interest rate rate - not enough information on your current loan to make a comparison?
Use the link below to look up Amortization Schedule for your current loan, with the original loan balance, and term at 5.75% and a new loan of $104500 at 3.4% over 120 months.
Link - IAS Plus - Basic Amortisation Calculator (http://www.iasplus.com/new/amortise.htm - broken link)
Loan Amount $ 104,500
Annual Interest Rate 3.40%
Term of Loan (in Years) 10
Monthly Payment $1,028.47
Number of Payments 120
Total Payments $123,416.31
Total Interest $18,916.31 (New Interest)
The first five years on 30yr mortgages, you paying more interest than principle. Every year after that you paying less interest and more principle.
You could be to the point with your current loan, you are primarily paying principle only. Honestly at your loan amount, there is no huge savings. Noting the new interest you would be paying.
At your age - you can not take a lot of risk in investments. I think you should be stock-piling money (not spending it) into CMO's or securities that pay a monthly dividend... Noting your probably still working, be sure to take advantage of the 401k catch up.
ModSpecialist is making some assumptions that I am not sure are correct for the OP's situation.
If the OP really does have about $50K in equity and really does have about a third of a 30 year loan at 5.25% and has cash I think they ought to be refinance and save about $2500 in interest which ought to wipe out any closing costs AS WELL AS taking a considerably smaller chunk out of the OP's pocket everymonth -- about $200 or $2000 a year...
I really LIKE the idea of having CASH and I would NOT put it into my home regardless of age.
I would definitely not put all your savings into your mortgage. What happens then if you have an emergency, can't pay your bills and you lose the house? You've just lost all that equity. Whereas, if you have the cash, and you have an emergency, you can get by.
A 10 year refi might be a possibility, since with a nearly 2 point reduction in interest rate, the payment wouldn't go up very much, if at all. But consider if you put that same $2500 against the loan and then made the same payments the 10 year plan would have you make, how long would it take to pay off the loan? It might not be worth all the hoops to jump through to save 6 months of payments.
However, it isn't an "all or nothing" thing. How much do you need to have for living expenses for a year? Assuming that is less than $50k, you could put the difference against the house. Or you could make double payments every month, with the overage applied toward the principal each month.
Just by making extra payments, while maintaining your savings, you can cut years off the mortgage, while still keeping the flexibility in case of an emergency.
As for your savings being at 1%, you should talk to your banker about setting up a 5 year CD ladder. That way, some of the funds are always coming up available every so often (depending on how you structure it, it could be anything from once a year to once a month, I think once every 3 months is common), and you earn a better interest rate. Still not great, but better than 1%. The best local rate in my area right now appears to be 2.25%. The money is still readily available in case of an emergency, you just lose some or all of the interest earned. I'm actually going to do this with my emergency savings this year. Going to keep half in a cash account, and put the other half into a 5 year CD ladder.
I'm going to work backward and make some assumptions here.
If you haven't made any extra payments on the mortgage previously, and it is a 30 year, and you have 11.5 years to go, that means you are at year 18.5 right now. With a remaining balance of around $102k, that means the loan was originally for around $180k. It also means your monthly Principal and Interest payment is around $1000. If you refi to a 10 year, your P & I would be almost exactly the same (within $10).
If those numbers are true, then let's look at not doing the refi. If you just take the $2500 and apply it to the loan now, you would be paid off only about 4 months early. So about 11 years instead of the 10 years in the refi. So there would be a difference of about a year's payments. For $10k-20k savings, that is probably worth doing, if you don't plan to move in the next couple of years. But since starting over with a new loan means re-frontloading the interest, and with no reduction of monthly payment, the short term savings will be minimal, they will come near the end. So don't refi if you plan to move in the next 5 years.
My question to you is whether you are sure about your value. I was pretty sure I knew what my home was worth in this market (I work in a real estate office), but when I had the appraisal done for my refi, I found out I didn't have the necessary 20% (some banks are requiring higher than 20% for a refi now, too) and would have to pay PMI if I were to refi. If you will have to pay PMI, then absolutely don't do it, it isn't worth it, and you are better off just putting extra toward the principal.
But I made a few assumptions to come to that conclusion, so the conclusion may be in error.
I agree with Chet...refinance to the 10yr term, keep your cash where it is.
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