Mortgage Refinace 30 to 15 ????

[LittleMsMom]

I refinanced my home shortly after I divorced, the first payment was in Sept 2010. I paid points on the loan to get a lower interest rate. The interest rate I got on the loan was 4.25% for a 30yr fixed.

No matter how much I tell myself I am going to make those extra payments to reduce the length of my loan, I just don't do it. So I am thinking of refinacing, which would force me to do it. I am wondering how do I calculate if this is a good financial idea?

I ran some numbers, not exact because I need to look up my exact mortgage balance to get an exact quote. Currently the rates are the same for the 15 year without buying down the rate as my current loans rate. I read on the Dave Ramsey site it is not a good idea to pay points, so this time around I am trying to base it on a no points refi.

Because the rates are the same the only difference is my monthly payment would go up by about 54%but I would be reducing the length of the loan by half, and paying much less interest over the course of the loan.

Other information...I do not really want to put a down payment on the refinacing, and I am not sure if that is going to be a HUGE issue or not, since they have changed the lending laws. The reason I do not want to pay a down payment is my house already has 35% equity.

What would you do? And how do I figure out if refinancing is a good idea since the interest rates are the same and not lower like most advice seems to suggest.

[disneysteve]

If the rate won't be lower, it probably doesn't make sense. There are costs to refinance but normally you calculate how long it will take to recoup those costs thanks to the lower rate and payment. You won't have a lower rate or payment so you won't ever recoup those costs. You will, of course, pay off the mortgage much sooner so you'll save that way. But you don't need to go to the hassle and cost to refi to accomplish that. Just make extra monthly payments. Set them up to be done automatically from your account each month since you are having trouble doing it manually each month. Make it automatic so that you don't have to think about it and can't talk yourself out of it.

[creditcardfree]

I agree. Make it automatic. You have a very good rate. Go to your mortage company's website...you might be able to do it online!!

[dczech09]

I would not refi. First of all, you have a 4.25% rate on a 30 year mortgage. That is a great rate, especially for a 30. Even if you pay points, it is not likely that you will get that much of a lower rate after qualification. Also, closing costs may eat up any perceived savings.

As for a down payment, you should not need to put a down payment on a refi assuming you have adequate equity in your house. The only reason lenders want down payments is so that A) you have more than a 0% equity position and B) you have some skin in the game (thus reducing risk of defaulting, moral hazard, etc). If you already have the equity built up, you should be fine.

I agree with DS; pay more on your payments. You say that you cannot seem to get yourself to do so. Keep telling yourself that a larger payment = faster pay off. Faster pay off = freedom! If you have to, set up automatic payments and force yourself to pay more.

Looking at your current situation, refi is not your best option.

[MonkeyMama]

Even if you could lower your interest rate, I wouldn't refi. I just prefer to have a low set payment. I Can pay extra whenever, but am not locked into a payment that is 50% higher, when/if things go bad.

I did have a 15-year loan on my first home, but have come to MUCH prefer the flexibility of a 30-year loan. Will probably pay it 10 years early, anyway.

Regardless, I'd rather work on forcing the extra payments than the fees/hassle of refinancing.

[herdjohnson]

Calculate what your payment would be for a 15 year payoff. Then just start making that payment. You don't have to make a separate payment and if you ever have any type of financial emergency you'll easily be able to drop your payment to the 30 year amount.

[greenskeeper]

I am paying my 30 yr note on a 12yr amortization. If things get tight I can always fall back on the 30yr payment. In fact, part of my emergency fund is 12 months of the 30yr payment.

[disneysteve]

Just to illustrate when one might consider a refi from a 30 to a 15, in November we did a refi from a 25 to a 15. We were almost 8 years into the loan so had a little over 17 years remaining. With the 15, we got a lower interest rate, a lower payment and a shorter term, so it was a no-brainer to do the refi. If there wouldn't have been any savings, we wouldn't have done it. We would have just continued to pay extra on the loan we had.

[greenskeeper]

what was the rate on the 25 compared to the 15? significantly less or are you factoring in your extra payments to the 25?

[disneysteve]

Originally Posted by greenskeeper

what was the rate on the 25 compared to the 15? significantly less or are you factoring in your extra payments to the 25?

Dropped our rate from 5.875 to 3.99

[greenskeeper]

If you had not payed extra, would the refi had been worth it?

[disneysteve]

Originally Posted by greenskeeper

If you had not payed extra, would the refi had been worth it?

I think so. I don't remember the exact numbers but it resulted in a lower rate, a lower monthly payment and knocked about 2-1/2 years off the term. The time to recoup the closing costs was fairly short and we have no intention of moving so we felt it was a no-lose proposition.

[frugalgirl]

Just make sure if you decide to make extra payments or pay more than the actual payment that you indicate to the mortgage company that the extra is for PRINCIPLE. Otherwise, they could put some or all of it towards interest and that is definitely not what you want them to do.

[LittleMsMom]

Thank you for all your comments. I have decided that yes, in case of Emergency having the 30 year loan to fall back on would be nice. If I have problems is a bank going to let me refi from a 15 year to 30 year. Most likely not at the nice rate I have now.

I went online and found an excell document that I can plug in my loan information. I can also plug in any extra payments I make and watch it auto calculate the interest savings and the watch it reduce the loan length. I hope once I have a fully funded Emergency fund, that having that tool will be all the motivation I need.

Thank you again.

[clintdavis]

LittleMsMom, you seem to be thinking about things the right way. Get your emergency fund built up, and then attack your mortgage. I agree with the others here, i wouldn't refinance this home as there is no real benefit. The thing about being in a 30 year mortgage is that you always have the option to pay more, but not the obligation. Of course, this can be both a blessing and a curse. But once you get your EF in place, estimate the full amount that you can pay toward your mortgage each month, and set that on an auto-draft with your mortgage company. Everything over your minimum payment will be applied to your principal balance. Use the tool you mentioned to determine how much extra you will need to pay monthly in order to pay off in 15 years (or even faster). And then keep track of the progress you are making. Make a game out of it...create a chart or graph...some type of visual reminder of what you are accomplishing. That will help keep your motivation and momentum going.

Keep it up. You're doing a great job! Thanks for sharing it with us!