Mortgage Refinance Question

[The UnDoug]

So I'm looking into refinancing my mortgage.

We've been in our house 17 years. We paid off our original mortgage about 11 years ago (we got the house for a very low price).

We took out a 30 year loan to do some remodeling about 7 years ago, and refinanced that loan about 3 years ago, going from a 30 year loan at 5.5% to a 20 year at 4.25%.

We still have 17 years left on the 20 year loan, but can now refinance to a 15 year loan (cutting off 2 years) at 2.75% (compared to the 4.25% we now have).

If our current monthly payment is $1500 per month (these are not the real dollar amounts, for the record), and we still have 17 years left, and the new loan would drop our monthly payment to $1000 for 15 years, am I correct in stating that we would save $126,000.00 by refinancing?

$1500 x 12 x 17 = $306000.00
$1000 x 12 x 15 = $180000.00

Difference = $126000


Is there anything I'm forgetting?

I know that if we pay more than our required monthly payment, this would affect the length of time to re-pay, and also the total amount paid.

I also know we need to subtract the amount we will pay in closing costs (roughly $3000 - $3500).

Thanks for helping out.

[davester]

Your math appears to be correct, but you are forgetting that you'll lose the tax deduction on the difference. Multiply your marginal tax rate by $126,000 and subtract that number from your savings.

Also, you should never pay closing costs on a refi, because you can't deduct them. Get a "no cost" loan where the closing costs are wrapped into the interest rate so that you pay a slightly higher rate. It only makes sense to go for a lower rate loan with high closing costs when you are doing a new purchase.

[Wailer]

davester wrote:

Also, you should never pay closing costs on a refi, because you can't deduct them. Get a "no cost" loan where the closing costs are wrapped into the interest rate so that you pay a slightly higher rate. It only makes sense to go for a lower rate loan with high closing costs when you are doing a new purchase.

My understanding is that you can deduct the points of a new loan in the year that the loan originated. If you refinance and pay points, that must be spread over the life of the loan.

I don't think the closing costs are ever tax deductible, except for a few government fees. In other words, you can't deduct title insurance, escrow, etc for a principal residence. If you are buying investment property, you can offset rental income with these expenses.

That being said, I don't think adding the total payments up give an accurate picture of the true cost of financing because it doesn't factor the time value of money.

The true cost of the loan is simply that you are now borrowing X dollars at Y percent. For a hypothetical $100 loan, I'd much rather have a 100-year loan at 2% than a 1-year loan at 20%. In the former, I'm paying $200 in total interest whereas in the later I'm only paying $20.

If your objective is to pay off the house as quickly as possible, you should get the lowest rate and apply the savings to the mortgage.

[The UnDoug]

davester, I have the option of "rolling" the closing costs into the loan, but figured it would be better to pay them outright, rather than to end up paying interest on the closing costs (which would be the case if I rolled them into the loan).

Are you saying, though, that I should not even pay the closing costs up front, but should instead get a loan with no closing costs at all, even if it means a higher interest rate?

By my calculations (using my *real* numbers), if I take the full 15 years to pay back my loan at 2.75% as opposed to the same loan at 3.00% (a guess at the rate I'd get with a no closing cost loan), I'd save $5812.20, which would be more than the closing costs (but only maybe $1000 in savings when it's all said and done, but still a savings).

Granted, I need to find out exactly how much higher the rate would be if I don't have to pay closing costs. If it doesn't go up .25% as in my example, the savings could be less or nonexistant.

That also likely means I'd need to shop around more, and I am having trouble finding time during the day to do the "shopping." I'd also hate to *not* find a no-closing cost loan, and end up losing the 2.75% rate I should be able to get right now.

[space-time]

do NOT add the closing cost to the new loan, i.d. do not increase your principal. if rates drop again and yu want to refinance again, you now have higher principal to pay.

as said, accept a slightly higher interest and they shold give you some credit to cover the closing cost.

the above is general advice, but in cases like these it's very unlikely the interest will go much lower, so this is probably the last refi you will do.

[tahoedrew]

The UnDoug, try this: http://www.hsh.com/refinance-calculator. It will help you look at all scenarios for your refi.

disclaimer: this site is owned by my employer and I've posted links to our calculators on the forum before.

~A

[The UnDoug]

Thanks, all!

tahoedrew, those are very helpful calculators! Thank you!

[edgarbc1]

alternate mortgage calc

i used this one to determine scenarios of closing costs in or out of my recent refi
Good luck and Congrats on a low rate!!

[lost in space]

UnDoug,

I have an Excel SS I did years ago that includes the option of additional payments either in lump sum or monthly. PM me your private addy and I'll email it if you want. Anybody else too.

[tahoedrew]

lost - that used to be the way to do it (spreadsheets). Thankfully, today it's possible to build online calculators that can do that for you: http://www.hsh.com/calc-amort.html. In fact, that's why we continue to build new calculators that can do the work of COMPLEX spreadsheets very easily for you in seconds, right on a website.

:boink:

~A