Can it be? Will this refinance pay off in 7 months?

[Nika]

Is something wrong with my logic? Am I missing something?

Balance left on the loan:
$307,621

Interest rate 4.75%
Current monthly payment: $1643 (I know it seems deceptively low, but I also pay maintenance close to $1,400)
time remaining 28.5 years

Next payment breakdown:
Principal $425.52
interest $1,217.67

If we refinanced now, to a 15 year fixed, new numbers would be:

Interest rate 3.5%
Monthly payment $2,199.13
Next payment breakdown:
Principal: $1,301.90
Interest: $897.23

So in the first month I would already be paying $876.38 more towards the principal and $320.44 less in interest.

Fees for the refinance would be:
$650 application + commitment fee
$450 appraisal fee
$900 title services and lenders title insurance
$250 government recording charges

$1090 daily interest charges (now, wouldn't that interest be paid regardless, even if I kept my current mortgage, so should I include it into my calculation? They put it there just to tell you how much money you need to have at closing).
So if I don't consider this number, than the cost of the refinance is $2250.

$2250 divided by $320 (initial monthly savings in interest) is 7.03 months.
if we do count daily interest charges, than it 10.4 months is the break even point.

We plan to keep the co-op for at least 2 years.

Am I missing something here? The above numbers are correct, but am I looking at them wrong?

[jpg7n16]

Nope. If you're adding the expenses to the balance, your math is spot on. If you're paying them out of pocket, it's still close enough.

In just the 1st 2 years, you'll save over $8,000 in interest. That more than offsets the costs of the refi.



The only thing to make sure about is that you can support the increased cashflow requirements. If the new payment still fits in your budget, there shouldn't be an issue. Given the info from your other post, I doubt the increased payment will be an issue.

[Nika]

This seems strange because I keep hearing on the rado that it takes many years for a refinance to be worth it... like 5-7 YEARS. So I was wondering how it can be so different for us and if I am not looking at it correctly. How can it be under a year?

[Slug]

In a word, YES. This is due largely to the shift from the 30 year to the 15. I've considered it myself, but my 30 is at 4.375 so the incentive to switch is lower AND I like the flexibility associated with the lower required payment on the 30 year (even though I do pay an accelerated schedule at the moment). I think I bought a bit too much house so this is what works best for me.

[Nika]

I also like the convenience of a lower payment. But 1.375% interest difference on $307,000 is not loose change. vs 4.125% on a 30. that's a 0.625% difference, wich is $1,918 per year difference. Than it takes about 2 years to break even.

[Petunia 100]

Originally Posted by Nika

This seems strange because I keep hearing on the rado that it takes many years for a refinance to be worth it... like 5-7 YEARS. So I was wondering how it can be so different for us and if I am not looking at it correctly. How can it be under a year?

I would never consider a refi that took 5-7 years to break even.

[YLTL_Dan]

Originally Posted by Nika

So in the first month I would already be paying $876.38 more towards the principal and $320.44 less in interest.

Nika - nice work, that's a great investment! The only other piece to consider is the "loss" of the additional tax write off you previously received for paying higher monthly interest. This would equate to $960 (($320*12)*.25) per year if you are in the 25% tax bracket.

This is definitely a short term view as the total interest you'll save from the 15 year loan will more than make up for it!

[disneysteve]

Originally Posted by Petunia 100

I would never consider a refi that took 5-7 years to break even.

Why not? It all depends on how long you plan to be in your home. If you are there for the long term, why not do something that will save you money after 5 or so years?

[disneysteve]

Originally Posted by YLTL_Dan

The only other piece to consider is the "loss" of the additional tax write off you previously received for paying higher monthly interest.

That isn't a loss. It is a benefit. Paying more interest just so you can deduct 1/4 of it makes no sense at all. Why pay $1 just to save $0.25?

[Nika]

Yes, it is scary to have such a large payment and no flexibility. But if refinanced to a 4.125% 30 year fixed, I would only be saving $160 a month in interest. It would take 14 months to offset $2250. Even longer if we consider the difference of just putting this 2250 on our existing mortgage directly instead of paying it for the refinance. So I'm not sure if refinancing a 4.75 to 4.125 is really worth it given the fee.

[Petunia 100]

Originally Posted by disneysteve

Why not? It all depends on how long you plan to be in your home. If you are there for the long term, why not do something that will save you money after 5 or so years?

Because a lot can change in 5 - 7 years. With BE that far in the future, there is a good chance you won't ever get there, so the money and effort to refi were wasted.

Personally, I wouldn't consider a refi if BE were more than 2 years away. And Nika's BE of 7 months? Oh yeah, I'd be all over that.

[Gina23]

Originally Posted by Nika

Yes, it is scary to have such a large payment and no flexibility. But if refinanced to a 4.125% 30 year fixed, I would only be saving $160 a month in interest. It would take 14 months to offset $2250. Even longer if we consider the difference of just putting this 2250 on our existing mortgage directly instead of paying it for the refinance. So I'm not sure if refinancing a 4.75 to 4.125 is really worth it given the fee.

Seems a lot of us around here are so anti-interest that we pay extra toward the principle per month anyway... I figure you might as well take advantage of the lower interest rate in the meantime, right? If you are that disciplined and don't need the flexibility to choose to pay extra toward the principle or not, then you will reap the reward of a super low rate. Good job. You will save a ton of money doing this.

[Slug]

Originally Posted by Gina23

Seems a lot of us around here are so anti-interest that we pay extra toward the principle per month anyway... I figure you might as well take advantage of the lower interest rate in the meantime, right? If you are that disciplined and don't need the flexibility to choose to pay extra toward the principle or not, then you will reap the reward of a super low rate. Good job. You will save a ton of money doing this.

Yes, many of us have the discipline and means currently to pay extra towards the principle. However, we are often not fully secure in our employment so if we lost our jobs, we could go back to paying the minimum again. If I re-fied to a 15 year I would just be SOL.

[Gina23]

Originally Posted by Slug

Yes, many of us have the discipline and means currently to pay extra towards the principle. However, we are often not fully secure in our employment so if we lost our jobs, we could go back to paying the minimum again. If I re-fied to a 15 year I would just be SOL.

I completely agree. I am not so fortunate either as I need the flexibility to yank the extra principle payment on a whim. The original poster in this case, however, seemed to be a bit more secure... however, that could've just been an assumption on my part. I know that if I were dead on secure on not needing that extra cash per month and I could take advantage of a 15 year mortgage rate, I would do it in a heartbeat.