Refinance Help (1%, mortgage, mortgage, property)

[BabelFish]

I currently have 5.875 and I have 185000 left on my mortgage. According to what I show, I will have this paid off early in 19 years. I was looking into refinancing to 4.875 (if I can find it ). If I did that and continued to pay what I currently am, I can have it paid off in 18 years. According to my math, that would only save me 11k (1 year of payments). The closing would cost me 1500.

The reason to do this is two reasons:
1. It lowers my monthly payment. This can help in case we get into a bad situation where we need more money one month... It also makes it better if we ever wanted to move. With the lower monthly, we can consider renting this place out.

2. It does save us 11k and gets us out 1 year sooner.

My questions are:
1. Should I considering the 30yr for the reasons stated above or just look into a 20yr.
2. Should I just stay where I am now and not touch anything?

Any other thoughts are greatly appreciated! Thanks in advance.

[faabala]

I guess the big question is is your work situation stable and/or is there any reason you would be moving in the next several years. Very few people stay long enough to pay off a house anymore.

[BabelFish]

as far as I know the work situation is stable (but who really knows in this economy).. I could see us moving in the next several years (less than 10 most likely).

[Daddys///M3]

I would say that the first thing you need to do is decide if you want to pay the mortgage off sooner or lower the monthly payment. They are mutually exclusive.

[BabelFish]

Originally Posted by Daddys///M3

I would say that the first thing you need to do is decide if you want to pay the mortgage off sooner or lower the monthly payment. They are mutually exclusive.

but that's my goal

Right now I show that I can pay off my mortgage by 7/2029.. If I refinance to a 30yr 4.875 loan but continue to pay the same amount, I calculate that I can pay everything off by 3/2027. Also, by getting the smaller mortgage it adds the ability to rent out the house later if we decide to do so (which would then cancel the "pay-off early" idea but add the "renting" idea)...

[Daddys///M3]

So ideally what you'd like to do is reduce the monthly outlay while continuing to pay the same amount, until some point in the future when you decide to rent it out? The problem is that 4.875% is not out there right now for a 30 year, and if the goal was to truly pay it off earlier you would be better off getting a 15 year which are pricing out at around 4.5%- 4.75% these days (depending on credit, loan to value, property type, occupancy type, location, etc.). Also, $1500 in closing costs seems kind of low. Are you guessing on that or were you quoted?

[BabelFish]

Originally Posted by Daddys///M3

So ideally what you'd like to do is reduce the monthly outlay while continuing to pay the same amount, until some point in the future when you decide to rent it out? The problem is that 4.875% is not out there right now for a 30 year, and if the goal was to truly pay it off earlier you would be better off getting a 15 year which are pricing out at around 4.5%- 4.75% these days (depending on credit, loan to value, property type, occupancy type, location, etc.). Also, $1500 in closing costs seems kind of low. Are you guessing on that or were you quoted?

$1500 is what I was quoted. I did find a bank that had 4.95 but it just went up today to 5%. I have been checking Mortgage Marvel and BankRate. If I went with a 15yr, the rate would be lower (about 4.55%) but the monthly would be more than I can afford (P&I about $1400 a month! )..

[AndrewSoss]

Originally Posted by BabelFish

$1500 is what I was quoted. I did find a bank that had 4.95 but it just went up today to 5%. I have been checking Mortgage Marvel and BankRate. If I went with a 15yr, the rate would be lower (about 4.55%) but the monthly would be more than I can afford (P&I about $1400 a month! )..

These are my favorite types of refi scenario problems:

I have found that looking at current payment vs. new payment vs. new amortization vs. old amortization really muddies up the water. There is a better way to look at it.

What are you really trying to decide between?

Is the question, do I want a 4.875% vs. 5.875%? No, of course everyone would want the lower rate. The question is then, how much should you be willing to pay to get this rate? Or framed another way, is $x,xxx ($1,500 in your case) worth refinancing or should I keep my current rate.

When you frame it this way, it becomes a much easier proposition because you can actually determine the Rate of Return on your $X,XXX ($1,500 in your case).

To do that, and to take out all the noise in the amortization data, let's compare apples to apples. Let's make the same payment you are making now and apply it to the new interest rate. Then we compare what your balance is in X number of years vs. what it would have been under the existing financing.
Then you divide the difference into the cost to determine what your rate of return is on that $1,500.

Here is the principal balance at the end of each year if you keep the same loan:

179,539.94
173,750.33
167,611.26 <----after 3 years
161,101.65
154,199.13 <----after 5 years
146,879.99
139,119.09
130,889.74
122,163.70
112,910.96 <-----after 10 years
103,099.75
92,696.35
81,665.02
69,967.86
57,564.68
44,412.88
30,467.25
15,679.89
0.00


Now let's keep the same payment, but see what it does to principal after those same key years:

177,674.15
169,983.07
161,908.57 <----3 yrs
153,431.51
144,531.84 <-----5 yrs
135,188.48
125,379.32
115,081.13
104,269.54
92,918.94 <----10 yrs
81,002.46
68,491.90
55,357.64
41,568.58
27,092.08
11,893.86


So, for $1,500 up front, without making any other changes in behavior (i.e. payments), you will have:

$5,703 more equity in 3 years
$9,668 more equity in 5 years
$19,992 more equity in 10 years

If you decided to put that money in the stock market, to get the same return, you would have to get a 56.07% rate of return over the 3 years, a 45.16% rate of return over 5 years, and a 29.56% annual rate of return over 10 years. And it would have to be risk free (which this basically is, assuming you weren't going to sell in the first few months and you never refinanced in those 10 years).

I hope this helps...any other way to calculate it doesn't show the true return.

Oh, and to echo Daddy/M3, it's going to be difficult to get that rate w/ those closing costs today. Probably closer to 5.125% for those terms today (which would still be a no brainer deal).

BEst of luck to you.

[acegolfer]

Originally Posted by BabelFish

I currently have 5.875 and I have 185000 left on my mortgage. According to what I show, I will have this paid off early in 19 years. I was looking into refinancing to 4.875 (if I can find it ). If I did that and continued to pay what I currently am, I can have it paid off in 18 years.

I believe your math is wrong. If you continue to pay $1348.61 (=-pmt(0.05875/12, 19*12, 185000) ) at 4.875% refinanced rate, you will pay off your mortgage in 16.75 years.

[acegolfer]

Originally Posted by AndrewSoss

So, for $1,500 up front, without making any other changes in behavior (i.e. payments), you will have:

$5,703 more equity in 3 years
$9,668 more equity in 5 years
$19,992 more equity in 10 years

If you decided to put that money in the stock market, to get the same return, you would have to get a 56.07% rate of return over the 3 years, a 45.16% rate of return over 5 years, and a 29.56% annual rate of return over 10 years. And it would have to be risk free (which this basically is, assuming you weren't going to sell in the first few months and you never refinanced in those 10 years).

Thanks. I understand all your numbers and it's a very interesting way to evaluate the refinancing option.

However, there's one (small) caveat. This analysis is biased towards refinancing because it doesn't consider the possibility of refinancing later if you don't refinance right now. In most cases, especially when the new rate is 1% lower than the current one, the benefit of refinancing outweighs the cost of refinancing. But the benefit can become higher, if the interest rate drops tomorrow. Unfortunately, there's no easy way to answer when to refinance.

On the other hand, I agree with others that $1500 closing cost is too low. $4000 might be a better number to start with but I could be wrong.