At what point do I refi? Specific details inside...

[lemmyk]

I know that others have posted similar topics, but I'd like for you math experts to help me out...

I have a loan I took out in Jan 2008 that was for $316,000 at 5.75% fixed 30yr.

Currently, the loan principal is about $311,000. What I would like to is to refi at a lower rate, but not increase the principal for the new loan. I have no interest in raising my principal any higher to pay closing costs, fee's etc. So I would assume that I would need a no closing cost loan at a bit higher rate...

Today's rates are around 5%, closing costs of around $4k or so + escrows... should I wait for rates to go much lower? Would it be worth it to refi now? I have a few thousand I could throw in (cash) into the loan to pay points or a bit of closing costs...

When would it be worth it to refi?

More details:

Credit rating ~750
Been there for 5 years, plan on staying at least another 4-5 years.
House was appraised in Dec 2007 at $490k, probably worth about $420 now...

I can't wrap my head around these numbers enough to make an educated decision.

Thanks in advance!

[noppenbd]

I am in the midst of a refi right now so I feel your pain. You need to a get detailed estimate of the closing costs. Just include the actual nonrefundable closing costs, not the escrows (you should get a refund from your current lender so the net cost is close to zero). Also consider you will not have to make the first month's payment so you can put that towards closing. Hopefully you can get together enough cash to pay all the CCs and escrow so your loan balance stays the same. Then look at the difference in your old monthly payment versus the new one. How many months will it take you to recover the closing costs (not including escrows)? If it's less than 4-5 years you should do the refi.

[Phatphoeater]

Bankrate's refi calculator works well to see how long it would take to recoup your closing costs.

Will you save by refinancing your mortgage?

I just plug in the total non-recurring closing costs in the other field and leave all the others blank.

my refi did not work out as the lenders decided to change the rules last week! we just closed on this house 9 months ago and the new HELOC lender decided we have to be in the house for 12+ months.

[jIM_Ohio]

I use an 8% guideline-

My payment for PI needs to drop 8% to make it even worth considering. Because you put a 4-5 year time horizon on the transaction (where you will move), I might consider 10-12% a better goal.

Consider- if you have 30 year fixed and refi to a 30 yr fixed, the payment will go down even if the rate is the same...

so run numbers to know that because you are 5 years in, you want to run numbers on a 25 year payment cycle (to keep playing field level with current mortgage).

You have 25 year left of a 30 year fixed at 5.75%
You want to see what a 25 year payment looks like with the new 5% rate- do you save 8%?

That is the litmus test for me.

[Gossioii4]

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[swanson719]

Right now, you're paying $1,844.09 before insurance or taxes. The interest on the life of the loan was $347,881.39. That's more than the value of the principle on the loan, and I'm guessing about 3 to 4 years worth of salary.

If you refi'd today into a new 30 year, you'd be paying $1,669.52 before insurance and taxes. The interest on the life of the loan at 5.0% is $290,030.27. From that view, you're saving $174.57 a month by refinancing, but more importantly, $33,345.68 in interest on the life of the loan. You've already paid $24,505.44 in interest over the last 16 months.

Switch to a 15 year fixed at 4.5% w.o paying a point. You're payment goes up to $2,379.13 before taxes and insurance, with interest on the life of the loan being $117,252.07. In general interest you save $172,778.20 over the life of the loan if you take a 15 year instead of a 30 year. Think of that as almost 2 years of your life you don't have to work to pay the bank.

What more concerns you, with a 30 year loan at 5.0%, you'll pay $71,176.52 in general interest over the next 5 years. Your remaining principal will be $287,014.15.

With a 15 year fixed at 4.5%, you'll pay $58,691.69 in general interest over the next 5 years. Your remaining principal will be $234,081.44.

With the 15 year, 4.5% you save $12,484.83 and lower your remaining principal by $52,932.71, giving you an aggregate savings of $65,417.54 over the next five years.

The cost in monthly payments for the 30 year for 60 months is $100,171.20, vs the cost for the 15 year for 60 months of $142,747.80. With a difference of $709.61 a month, or $42,576.60, over 60 months, you actually save yourself $22,840.94 from a pure interest & principal standpoint. When you go to sell your house 5 years from now, you'll owe $52,932.71 less than if you stayed with a 30 year.

Because you save $65,417.54 while spending an extra $709.61 per month, or $42,576.60 over 60 months, that extra $709.61 is earning you $380.68 each month because you save more than the difference you pay in. Good luck finding a 53% interest rate somewhere else.

Even if you have to use the few thousand set aside to refinance, it makes sense. You'll recoup $5,000 in 29 months if you refi with a new 30 year. It's better to refi to a new 30 year than stay in your current loan. But the 15 year saves you too much money to not do if you can even begin to afford it.

[PPorter99]

I agree that you've gotten some good advice already, but also understand that it can be confusing to wrap your mind around all the numbers when you're not used to dealing with them (been there!) One thing I know, as was stated earlier, is that you need to calculate the pay-back period of your NON recurring closing costs (remember the escrows aren't really a 'cost'. While you will need to have the cash at closing, you'll get refunded the same amount shortly thereafter from your existing escrow account).

The other point that is worth re-emphasizing is to be careful not to fall for 'false' savings. In other words, you might talk to a loan officer who shows you that you are saving more than you really are because they're not accounting for the fact that your re-amortizing your existing mortgage that you have already paid down a bit.

let's look at an example, using hypothetical and simple round numbers to make a point:

Let's say you started with a $300,000 loan on a 30 yr mortgage and have paid on it for 10 years to bring it to $250,000. Now you want to see how much you'll save with a new rate. HERE IS WHERE YOU NEED TO BE CAREFUL.

If your original rate was 6% and your payment was $2,000, and you ran your numbers through a calculator (or sneaky loan officer) using the SAME RATE of 6% on a 30 year loan, it would look like you're saving money. That's because you're now making payments on $250,000 over 30 years rather than over 20 years (what's left on your existing loan). DON'T FALL FOR IT!

This may be very obvious and I hope I'm not insulting your intelligence by explaining it. Definitely not my intention. However, I have just seen it happen too often when discussing refinancing with friends and family that it's a simple oversight that is easy to make (especially if you're being 'sold' by a loan officer on the benefits of giving them your loan to work).

One more point to consider... If you think you'll be moving in 4-5 years, and the payoff on the refi is 3-4 years, it 'technically' makes sense to do it because you'll save money. However, you should also consider the best use of your cash at the moment. If you'll only save a little bit starting 3.5 years from now, and in the meantime a lot of things could happen where you wish you had that extra cash on hand (speaking from experience).

So, while I know how it feels to want to 'have the answer', there are really many variables to consider and only you can determine whether it makes sense for you. Good luck!