Refinancing - numbers making my head spin!

kashka_katNovember 18, 2010

I just can�t get my head around how to figure the actual savings of 15 yr @ 3.75% vs continuing my current mortgage.

Right now I�m paying a total of $760 for P&I for a 1st at 5.5% & 2nd at 4.5%, with a total of $84,000 remaining to be pd over the next 13 yrs. If I refinance at the 15 yr rate, I pay $610 for P&I, a savings of $150 a month. When I look at the amortization tables though, because I have paid down somewhat on my current 2 loans, it doesn�t look like I save all that much in interest with the new loan, and in fact the first few years I�ll pay a little more, bout $430. And then when I consider how much equity I�ll have in the house in 5-10 yrs time (when I sell) that further adds to my confusion.

I guess I really should talk to a financial consultant but �. In the meantime, could y�all help me to understand exactly how to figure what exactly my savings are? Am I just looking at the monthly payment savings, or equity accumulation - probably some combination of both??

Another option is to do 30 yrs and I have read in this forum that that makes some sense when you need more liquidity in your assets (which I do). W/15 yr loan � I could put an extra $1800 per year in savings vs. $4080 per year with the 30 yr loan. Or to be honest I could be more disciplined and save the same amt. $4080 per year and still have the benefits of the 15 yr loan. EEEK - my brain hurts!

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I'd be a bit happier if I had your rates. Mine are 6.625% on the 1st, 8% on second. I've also been spinning round in circles for over a year about the re-fi.


First, you have not provided how much you owe on 1st, & how much on 2nd. (not sure that makes a difference?)

Second, did you orig. have a 15 yr loan or?
How long have you owned your home?

I'm probably going in circles here. ok?

FIRST, it COSTS you to re-fi.
SECOND, I 'think' it depends on how long you've had your loan.

There is lots of info on the internet which can tell you when it makes sense to re-fi, or not. Altho I've read some differences. Basically...
You need to determine how long it will take you to re-coup the COSTS of refinancing to determine whether it's worthwhile.

Another thing, it is now REQUIRED to have a PHYSICAL APPRAISAL - none of these 'drive-bys' or 'on paper only'.


Were you considering refinancing through a National Bank?
OR, through a Credit Union or smaller local bank?

Do you have at least 20% equity in your home? (to avoid PMI?)

Is your credit stellor? What is your "debt-to-income ratio", and, (haha) if you are working, can you provide PROOF to the re-fi institution that you are 'guaranteed' a job for at least the next 5 years?

National banks are tight - very tight right now with lending.

There is a LOT more to consider, & I'm sure someone will come along to help clarify.

In MY case, I just want to get rid of my 2nd. I owe about $10,000 on it @ 8%. Can't re-fi because no equity.
BUT, even with the MINIMUM $3000.00 PLUS to re-fi, I was thinking just take that 3k + and apply to the 2nd, & forget about the appraisal, paperwork, etc. for awhile.

Just one more thing:

I was reading some comments to an article I saw within last day or two.
One lady said she has equity. She is not behind on her house payments. She was simply trying to re-fi to get a lower rate. She had just rec'd a phone call telling her that she didn't have 'clear title'. She was shocked after paying on her home for so many years. (She did NOT mention who she was trying to re-fi through)

They DO offer these "lock-in rates" - at a cost to you!

    Bookmark   November 18, 2010 at 10:25PM
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Hi Kashka,

Let me start off by saying what you are asking isn't tough... I'll show you in a moment... BUT FIRST, based on the simple things you've just said, I would definitely strongly urge you to get with a good planner/advisor who can make sure you're setting yourself up for success, not trapping yourself into eventual failure.

OK... to figure your current REAL costs of interest, do this;

A) take the principal balance remaining on your 1st loan,
B) multiply by the interest rate.
C) THAT figure is your annual interest cost on that loan.

D) do the same thing for the balance of the 2nd, at the rate (4.5%) on the 2nd.

E) add the two figures together... that is your total of you current annual interest costs.

F) take the total balances together of the 1st and 2nd (you say its about $84,000.)
G) add $5,000 as a loose & liberal theoretical closing costs for a new loan at the lowest rate (thus, $89,000.)
H) Multiply the $89,000 by the lowest available new interest rate (let's say 4%, again to be loose & liberal.)

J) Take the number from #E, and subtact the number from #H, and you have the projected annual interest savings by refinancing exactly the balance as you have it structured now.

NOTE: You *can* do exactly this without adjusting anything else in your family household monetary structure... and if you were vulnerable to unknown emergency liquidity risks before you will STILL be equially vulnerable. If you were leaking away thousands of dollars in opportunity costs of over-paid insurance premiums before, you'll STILL be leaking away those thousands of dollars after your refinance.

If you later discover you should have rebalanced your home equity within your household equity plan, you'll be faced with the choice of doing it right all over again (and paying another round of closing costs,) or just continuing to bleed.

Much better off to take your time, get the proper guidance & support, get it done right.

Dave Donhoff
Leverage Planner

    Bookmark   November 18, 2010 at 11:17PM
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From a really high view....
Going from a 5.5% rate to a 3.75% rate is a big winner as long as you plan to stay in the home. Don't get bogged down in the amortization tables. You are going to pay substantially less per month and pay off the loan in roughly the same time period. That is a win.

If your head is spinning, it probably would pay to sit down with a financial planner. If you are just looking for some general strategies though.

In order of importance after re-fi:

Do you have a 8-12 month emergency fund? If not, put your extra money into savings until you build that up.

Do you have any other debts? If so, use the extra money to pay them off.

Are you saving for retirement? If not, start.

Do you have any known mid-term expenses - new car, new roof etc? If so, start putting money aside for that. Don't count on your emergency fund to pay for things you can predict.

If you have all the "little" ongoing things above paid for, then start paying down your mortgage.

If you can tick off all the items on that list, you are on your way to financial freedom.

    Bookmark   November 19, 2010 at 9:11AM
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I read the exchange above a few weeks ago and it stuck in my mind because I've been thinking maybe we should refinance (again). We refinanced three and a half years ago to a 30-year mortgage at 6.125%. Rates are so much lower right now that I keep wondering if it would be worthwhile to take advantage of them. However, every time I do the calculations, it does not seem worth it.

For example, I just did them again, using a plan offered by ING as comparison to what we have: 2.990% for five years, based on a 30-year amortization, with the balance due after five years. Compared with keeping our current mortgage, the overall savings (i.e., the balance at the end of five years minus the closing costs -- which are low right now because they have an offer going of discounting $2,000 from closing costs) would be a bit less than $4,000. Rates any higher than the 2.99% (e.g., if we went with a straight 30-year mortgage from a bank) would yield even less in savings. The ING mortgage would be about $350 less per month than what we're paying now. But I think overall, taking tax deductions, closing costs, and all the rest into consideration, it would be more or less a wash, right? Plus, a plan like the one offered by ING forces you to either pay off or refinance after five years, whereas with our 30-year mortgage, we have the security of a stable payment that is really fairly low.

We have no other debts, btw, and are putting the max into retirement accounts. We live on about a third of our gross income.

    Bookmark   November 27, 2010 at 12:03PM
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Unless you are planning on moving, never, ever finance a mortgage that has a final balloon payment. Too many things could happen. Better to look for a 30 year mortgage at a lower percentage than what you have. That way if the rate goes down enough you can refinance for the better rate. If rates go up and they will eventually you are locked in the lower rate for the 30 years.

If you refinanced 3 1/2 years ago at the rate you are giving either you did not look for a better rate or there is something that the mortgage lender sees in your file that they do not like. 6.125% was a little high at the time you financed.

    Bookmark   November 27, 2010 at 11:31PM
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Oh, we were just stupid. We both have excellent credit (in the 800s). Rates had ticked up a bit when we locked in, but we didn't know if they were going to continue to go up so we just went ahead with the refinance. Then, of course, they went back down. The reason we refinanced at the time was because our high payment on a 15-year loan was not letting us save enough of an emergency fund, and it was making me nervous.

I agree about the balloon payment loan. I was just using that as an example because the rate was about the lowest you can get, I think.

    Bookmark   November 29, 2010 at 2:05PM
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thanks all! Still not sure I get it but at least I'll be savying about $160 a mo. in payments which I could use right now... Am looking at closing costs. NOW my question is... what's the deal with the interest charges pd along with the closing costs? Like, they just can't wait till I start making my regular payments? I dont get it.

The loan officer person couldnt tell me exactly how much it would be either - soemthing to do with when in the month the closing is. What time of month would be most advantageous? I want to pay as little as possible because Im not rolling the closing costs into the loan

THANKS AGAIN!!!!!!!!!!!!!!

    Bookmark   November 30, 2010 at 6:36PM
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Any loan has interest due every single day of the month. So you close on Dec. 7th and your first payment is due January 1. Your old loan, now paid off in escrow, was due on the 15th of the month. You made the 11/15 payment (interest is part after, unlike rent which is paid in advance), so your interest is paid until 12/15. So they will calculate what you will get back as a credit from interest from the 7th to the 15th of Dec. Now you will also owe the bank interest between 12/7 to 12/31.

Change any of those dates, and everything gets recalculated.

    Bookmark   November 30, 2010 at 6:59PM
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I can see that you are stuck on this mortgage but your statement that you could use the extra $160 now is a red flag that you should stop and review your finances. Perhaps go to a consumer credit counseling service.

The $160 you think you will be saving will be eaten up by the closing costs.

If you are having problems now your problems will be even bigger in 5 years. The amount you believe you will save is less than the cost of lunch or dinner out a couple of times a month. If that little amount is a make it or break it amount you are only digging yourself a bigger hole and probably lost house in a number of years.

    Bookmark   November 30, 2010 at 8:56PM
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Yikes, who goes out for $80 dinners? $160 to me is a week & 1/2 of groceries. Did go to a financial planner and he thought the refinance a âÂÂno brainerâÂÂ.

That said, I still havenâÂÂt ruled out the 30 yr loan at 4.5%. I have locked at 15 yrs at 3.75 but have the option to switch to 20 or 30 yrs at whatever rate is in effect at the time⦠but I only have a month to decide.

Another question - is it possible to refinance a 1st mortgage and hold onto the 2nd as is?

That would give me extremely LOW P&I of $345 a month in 5 yrs when I retire, and since itâÂÂs a 2-flat IâÂÂd have rental income to cover that and the taxes. With the savings I could pay off the $15,500 second in 3-4 years.

Re: the interest, it sounds like if I close at the end of the month IâÂÂll have less interest to pay?

ps hmmm is the credit counselor a different animal than the financial planner? The FP I saw may have been biased since he works for the credit union.

    Bookmark   December 1, 2010 at 12:07PM
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It's not that you will have less interest to pay. There will be no free days. It will all get adjusted and rolled into your closing costs.

    Bookmark   December 1, 2010 at 12:25PM
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thnx to everyone - Im going to do the 30 yr + keep the second, as I outlined above. It was helpful for ya'll to raise the red flags. It was hard to give up that 3.75% (SIGH!!!) but oh well......

    Bookmark   December 9, 2010 at 10:54AM
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Ok - that was step 1. Now, set up an autodraft to have the extra money automatically sucked out of your paycheck/checking account and moved into a savings/investing account. The only way this strategy works is if you 100% commit to saving the difference in your payments.

    Bookmark   December 9, 2010 at 11:52AM
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