This is a mathematical question, so don't guess - figure it out. If the money is not a problem up front, go with the loan that is least expensive adjusted for inflation. If your lender/broker isn't willing to sit down and crunch the numbers with you, find one that is.

Keep in mind that the premium pricing (discount points) on fixed mortgages has a break-even point, generally in 2-5 years.

This means that every dollar you pay at closing that results in a lower interest rate will take 2-5 years of that savings from the lower interest rate to recoup the dollar back to you.

From THAT point forward, the savings is going into your pocket... OR, if applied to your payments of principal, accelerating the payoff of your loan.

For people who are certain that refinancing to a FRM is the choice they want, I recommend the following strategy;

Buy the MAXIMUM ALLOWED discount points to reduce the rate as FAR as possible, and finance the costs of the points into the loan amount itself. THEN continue to pay the same amount monthly as though you had never refinanced.

That way the increased amount of the principal is aliminated in that 2-5 year period, and the borrowers then DRAMATICALLY accelerate their loan payoffs.

Cheers,
Dave Donhoff
Just some mortgage guy ;~)

We just refinanced last year and we had a little surprise at taxtime. I thought if we did take points that the full amount of the points could be deducted from our tax debt. It turns out (at least in our state) that they can be deducted on an original mortgage, but on a refinance, the points can only be deducted 1/30 per year (on a 30 yr mortgage). We paid $900 in points and only got back about $12 in tax deduction. We could have put the $900 into the principal instead and saved gazillions over 30 years. :( Live and learn. Anyway, here is a link to a good refinance calculator if you want to check it out.

Here is a link that might be useful: Bankrate.com refi calculator

Hi Sunny,
The tax thing on refi's is an IRS thing... thus it's all states.

Rest happy, though, you'll definitely save FAR more by reducing your interest with discount points on a 30 FRM than had you directed the same funds to principal and had higher interest rates.

Cheers,
Dave Donhoff
Just some mortgage guy ;~)

Thanks Bill, Sunny and Dave! That is what I thought. We have been thinking about refi for almost a year now. Right now the rates are too inticing to pass up. I would love to be able to say that we will keep the payments the same, but unfortunately the town is doing a tax re-eval and our house will come in at over 100K more, and the tax rate is also increasing. So, that means a hefty increase in taxes. We are also thinking about taking a HELOC or LOC, not sure which. Most of the $$ will be used up front for window replacement and some renovations.
Another question - how many years can you take off of a mortgage by paying one extra payment a year?
Thanks again!

Yahoo and other sites have amortization calculators to help you crunch the numbers. If you do make extra payments, make sure to document them and make sure they are applied properly. That is one of the most common things for a mortgage company to mess up.

Here is a link that might be useful: calc

Thanks Bill! Looks like I can go with a 30 yr, 2pt and get almost 2% lower than our current, and take the 8 years (or more) off by increasing the principal payment.

Ahhh.... I love it when the lights go on!
Dave Donhoff
Just some mortgage guy ;~)

Thanks Dave! Does that mean that you agree with the way I want to do this? I lack confidence when it comes to this stuff! :)

It is a bit of a scary leap, but it can certainly pay off in the longrun. Putting the numbers on paper in front of you is always a good way to reassure yourself though.

At this point, refinancing is a great deal for almost everyone. If you want to doublecheck and play with the points etc to see what is the best deal for you, you might spend a minute with this calculator and check out all the options. For someone who plans to be there 30 years, the lowest interest rate usually is the best deal.

Not to confuse the issue even more, but if you aren't maxing out your retirement savings, you might look into that before paying down the mortgage with extra payments. Most people don't want to think about the stock market right now, but interest rates are this far below historical rates of return for the market, you have great options available. A grand a year in a roth ira could be a much better bargain than a grand a year against a 5.5% loan.

Here is a link that might be useful: How Much you save

Mo,
YES... you are seeing the LIGHT! I think you are absolutelyon the right track (*IF* you intend to shoot the very low probabilities of keeping your first lien in place longer than 10 years.)

Billl,
Not to confuse the issue even more, but if you aren't maxing out your retirement savings, you might look into that before paying down the mortgage with extra payments. Most people don't want to think about the stock market right now, but interest rates are this far below historical rates of return for the market, you have great options available. A grand a year in a roth ira could be a much better bargain than a grand a year against a 5.5% loan.

YOU are absolutely DEAD ON in that comment!

I couldn't agree more as to how much sense it makes to look ahead and be sure you're in a position to direct as MUCH discretionary monthly funds into the equities markets... as since they've been so hammered down, they are actually FINALLY in a much better position for great future growth again.

When? How much? Which ones?
I certainly don't know... BUT I know the PROBABILITES are far greater than they have been in probably a decade (again!)

Cheers,
Dave Donhoff
Just some mortgage guy ;~)

Dave and all,

As a shrewd mutual fund manager, who ran a value based system, used to say,

"I like to buy a dollar for 40 cents."

His fund didn't do so hot in sizzling markets - but it resisted downslides more effectively, as well.

He was patient - willing to let his buy orders for stocks sit for a long time. Quite a few of them got filled when the market dropped, however.

On the other hand - some fund managers say that they like to keep almost fully invested nearly all the time.

Some investors seem to have been willing in recent years to pay a dollar - for 40 cents worth of stock.

How did the old (was it German?) saying go, "Ve get too soon ouldt - and too late schmardt"?

Good wishes for a prosperous summer, all,

joyful guy.

Thanks guyz!! Great site Bill! I will definitely play with that one. Retirement funds are doing ok, so that isn't an issue right now, but thanks for the reminder!