Be careful with home re-financing (PMI, loan, interest rate, fees)

[DRob4JC]

Last year Chase was repeatedly sending us offers to refinance at a lower rate to save money on monthly payments. I think we were getting an offer about once a month for six months straight.

Now we are 11 years into our payments at 5.3% - I think their low offer was 3.8% for a 20 year term. My problem is that I did not want to restart the interest/principal time clock - where at the beginning of the loan, a huge portion of the payment goes to the bank in interest money. We plan to sell either now, or in a few years - and I want as much equity built up as possible. Plus it gives Chase more money right now - I have a problem with that.

All refinance situations are different - so tread carefully.

[tel0004]

Refinancing should not reset the interest principal clock. (it really doesn't exist). On a 30 year loan, you pay so much in interest early on because the term of the loan is very long, and your balance is very high.

When you refinance, your term is shorter than the original loan, and you balance is lower.

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If you have a 200k loan, 30 year, at 5.3%, you will pay 1,111 a month.

Year 11, your payment is still 1111. Of which 405 goes to principal, and 705 goes to interest. Your balance is 159,393

If you were to refinance the 159k, you would have a new payment of 949 a month, and 444 would go to principal, so by refinancing you are building equity in your house faster. Plus, you now only owe 949. Why not keep paying 1111 a month, and put even more money towards principal?

One thing you don't want to do is extend the term of your loan significantly (if you are 5 years into a 30 year loan, don't refinance into another 30 year loan. Get a 25 year loan, or even 20 if you can afford it.

In your situation since you are moving, its not a big deal you didn't refinance, but if your interest rates are lower, then refinancing is a good deal if you will stay in your home. I did ignore fees, which need to be factored in, but refinancing is still often a great idea.

[SmartMoney]

As a general rule of thumb, we try to determine how long it will take you to recoup your expenses, and if you plan to be in the home that long or longer, move forward. If you are able to reduce the term, you should do so if your payment is less, or, you will take a minimum of 5 years off the Mortgage (preferably 10 years). But these are basic guidelines.

Now that said, who am I or anyone else to tell someone their refinance is not worth it for the $140, or even $120 in savings? That could be the difference that puts groceries on that family's table. Or, that clock reset could be what puts more interest into the borrower's tax return....or a simple restructure could move the pmi from being non tax deductible to now in the rate and 100% deductible. I'm not advocating any of these situations, but I do think emphatic statements should be used with caution, because no two situations are the same when it comes to refinancing, because no two families are the same. There are just too many moving parts.

[thelopez2]

Originally Posted by DRob4JC

Last year Chase was repeatedly sending us offers to refinance at a lower rate to save money on monthly payments. I think we were getting an offer about once a month for six months straight.

Now we are 11 years into our payments at 5.3% - I think their low offer was 3.8% for a 20 year term. My problem is that I did not want to restart the interest/principal time clock - where at the beginning of the loan, a huge portion of the payment goes to the bank in interest money. We plan to sell either now, or in a few years - and I want as much equity built up as possible. Plus it gives Chase more money right now - I have a problem with that.

All refinance situations are different - so tread carefully.

You haven't given any information on closing cost.

You have a 19 year loan at 5.3% versus a 20 year loan at 3.8%. And the reason to not refinance is WHAT?

It gives Chase more money right now? Your payment would have gone down, so you don't want to save money because it would restart a clock?

If you look at your INTEREST/PRINCIPAL clock at 5.3% versus 3.8% you'll see a big difference.

IF you want to build equity, you take a lower interest rate and pay down more principal, basically giving Chase more money right now which you have a problem with.

I'd suggest sitting down with someone and have them show you the amortization tables and show you how much money you are throwing away by treading lightly.

Did you know if you make the same payment on the 3.8% loan as you do on the 5.3% loan your loan would end sooner than 19 years?

[schoolofhardknocks]

A really simple way to think about refi is:


1. Take your current P&I payment and multiply it by the remaining months = X

2. Take your new P&I payment and multiply it by the new term (in months) = Y

3. Y - X = Money you will save from refi *

4. If the closings costs aren't included in the new balance, subtract that from step 3


Some people also benefit just from lowering their monthly payments. By reducing the amount of cash going towards the mortgage, they are able to keep their homes.


* the real analysis can get more complex, but this is a good starting point

[StrkAliteN]

I am always amazed and amused by adults who have no idea of math. And how it applies to money / financing etc ...

I am an ex construction worker ( not in RE at all )

There's an old saying ... 'a fool and his money will soon part ways'