The Saving Advice Forums - A classic personal finance community.

Does refinancing make sense for us?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Does refinancing make sense for us?

    I haven't got a clue how to figure out if it makes sense for us to refinance or if we'd come out about the same by just making extra payments on the existing loan. If anyone can help run the numbers, that would be great. Let me know if you need numbers or details I haven't provided here.

    Current mortgage is a 25-year fixed at 5.875%. We have 18 years, 2 months remaining, though I don't believe that reflects extra principal payments we have been making so the actual remaining term is a bit less than that. Balance is about $91,000 and the P & I is $697/month. We currently pay at least $200/month extra.

    We could get a 7/1 ARM at 4.125% for 90K with a monthly payment of $436. If we continued to pay the same $900/month that we currently pay, when would it be paid off? How about if we could also pay an additional $5,000/year toward principal on top of that $900/month? Would it be repaid before the first rate adjustment in 7 years? The first adjustment is capped at 5%, still less than we pay now, so for at least 8 years, the rate would be lower than now. Could the loan be gone in 8 years?
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

  • #2
    Originally posted by disneysteve View Post

    Current mortgage is a 25-year fixed at 5.875%. We have 18 years, 2 months remaining, though I don't believe that reflects extra principal payments we have been making so the actual remaining term is a bit less than that. Balance is about $91,000 and the P & I is $697/month. We currently pay at least $200/month extra.

    We could get a 7/1 ARM at 4.125% for 90K with a monthly payment of $436. If we continued to pay the same $900/month that we currently pay, when would it be paid off? How about if we could also pay an additional $5,000/year toward principal on top of that $900/month? Would it be repaid before the first rate adjustment in 7 years? The first adjustment is capped at 5%, still less than we pay now, so for at least 8 years, the rate would be lower than now. Could the loan be gone in 8 years?
    If you have excel there is an amortization template which is pretty simple to run numbers with. Plus, plenty of calculators online.

    Anyway, If you pay $900/month on the ARM, it will be paid off in about 10 years. (After 8 years, the balance would be about $20k).

    If you added another $5k per year, it would be paid off in 6.5 years.

    Of course, then the question is how much does it cost to refinance and how does that enter into the equation? You could add $200/month to your current loan and pay it off the end of 2021. (About 12 years?). & you can add another $5k per year to pay it off in about 6.5 years.

    I think I'd vote that it doesn't make much sense. Since refinancing can generally be a lot of hassle and expense.

    Comment


    • #3
      It's not perfect, but from the calculator I've got (a rather basic one I built myself), a $90k loan at 4.125% with monthly payments of $900 will finish the loan in 10 years, 2 months. Total cost: $110450.

      Comment


      • #4
        Originally posted by MonkeyMama View Post
        I think I'd vote that it doesn't make much sense. Since refinancing can generally be a lot of hassle and expense.
        This is the what I've been thinking. If refinancing was a simple, no-hassle process, I might consider it, but we've done it a couple of times and it is a royal pain in the behind. I would do it again if it would save us a considerable amount of money, but if it won't, I'm not going to subject myself to the hassle.
        Steve

        * Despite the high cost of living, it remains very popular.
        * Why should I pay for my daughter's education when she already knows everything?
        * There are no shortcuts to anywhere worth going.

        Comment


        • #5
          Here are good calculators:
          Loan Comparison - Refinancing
          Prepayment Mortgage Reduction

          Comment


          • #6
            Depends on the costs in my opinion...how much will it cost to refi? Have you asked your current lender for a modification instead? Some banks will modify the loan for a fee, which allows you to skip a lot of the typical refi costs.

            Comment


            • #7
              Originally posted by minnie1928 View Post
              Depends on the costs in my opinion...how much will it cost to refi? Have you asked your current lender for a modification instead? Some banks will modify the loan for a fee, which allows you to skip a lot of the typical refi costs.
              I haven't gotten that far. I was just noticing how low rates have fallen and started wondering if it even made sense to look into it.
              Steve

              * Despite the high cost of living, it remains very popular.
              * Why should I pay for my daughter's education when she already knows everything?
              * There are no shortcuts to anywhere worth going.

              Comment


              • #8
                Could you get a fixed rate home equity loan-Penfed has them at 3.99% for up to 60 months and 4.99% for 60-120 months? You could use the loan to pay off your mortgage (if you have enough equity). These are no-cost loans and would give you the lower interest rate for you to do what you please. It sounds like, no matter what, you will probably have your mortgage paid off within 10 years anyway.

                The payment on the 60 month loan would be $1675.49

                The payment on the 120 month loan at 4.99% would be $964.75

                The 120 month loan would be close to what you currently are paying with your additional payments and the 60 month loan would incorporate your potential intention of including an extra $5000/ year (and then some) toward principle, although it would all be paid off within 5 years...
                Last edited by mdcrim; 03-21-2010, 05:44 AM.

                Comment


                • #9
                  Originally posted by mdcrim View Post
                  Could you get a fixed rate home equity loan-Penfed has them at 3.99% for up to 60 months and 4.99% for 60-120 months? You could use the loan to pay off your mortgage (if you have enough equity).
                  When I was still working at the bank, we had a lot of customers go this route. I believe the fees were minimal and the turnaround time was pretty quick.

                  Comment


                  • #10
                    mdcrim, that's an interesting idea. I'll have to look into that. Thanks.
                    Steve

                    * Despite the high cost of living, it remains very popular.
                    * Why should I pay for my daughter's education when she already knows everything?
                    * There are no shortcuts to anywhere worth going.

                    Comment


                    • #11
                      Originally posted by disneysteve View Post
                      I haven't got a clue how to figure out if it makes sense for us to refinance or if we'd come out about the same by just making extra payments on the existing loan. If anyone can help run the numbers, that would be great. Let me know if you need numbers or details I haven't provided here.

                      Current mortgage is a 25-year fixed at 5.875%. We have 18 years, 2 months remaining, though I don't believe that reflects extra principal payments we have been making so the actual remaining term is a bit less than that. Balance is about $91,000 and the P & I is $697/month. We currently pay at least $200/month extra.

                      We could get a 7/1 ARM at 4.125% for 90K with a monthly payment of $436. If we continued to pay the same $900/month that we currently pay, when would it be paid off? How about if we could also pay an additional $5,000/year toward principal on top of that $900/month? Would it be repaid before the first rate adjustment in 7 years? The first adjustment is capped at 5%, still less than we pay now, so for at least 8 years, the rate would be lower than now. Could the loan be gone in 8 years?
                      Steve- I have the microsoft template and here is what I plugged in

                      Original loan is
                      $109,600 borrowed at 5.875% for P&I of $697.80

                      91k owed is payment #93
                      In this situation, loan is paid off after 300 months (25*12).


                      93/12=8
                      meaning you are paying now based on this being the 8th year of the loan (none of above factored in extra payments of $200/mo)


                      Adding in $202.80/mo to above extra on principal... ($900/mo total payment)


                      91k owed is payment #47
                      this implies that 47/8=6, you are paying as though this is 6th year of loan (you are 2 years ahead of schedule above) and this loan will be paid off in 186 payments (about 10 years less than above).

                      So you GAIN $900/mo for 10 years which is $108,000 of cash flow over a 10 year period.



                      ----------------
                      with the new loan, if you did 4.125% for 91k financed

                      I have a P&I of $486.63 and put an extra $413.37 to principal (total payment of $900/mo).

                      The loan is paid off after payment 125, which is just over 10 years from today.

                      What I would need to make sure I have all this right is for you to disclose the following...

                      1) when did you take original loan
                      2) is it really 91k you owe on mortgage now
                      3) I need to confirm the "payment #47" in scenario 2 is the same as payment 1 in scenario 3.


                      ---

                      I tried answering my own question by stating you owed 91k at 5.875% for 18 years (payment of $683.55). Then added in an extra $216.45 per payment (even $900 total) and have a repayment period of 140 months from today.

                      This would imply refinancing is going to save you 15 months of $900/mo which is $13,500.


                      The question I would ask
                      what risks are you taking to acquire $13,500 of future cash flow.

                      1) rates rising
                      2)

                      then what do you get for taking that risk
                      1) only 50% of payment is required (the adjustable rate has more than 50% of payment going to principal)
                      2) the closing costs to refinance


                      There is mortgage interest saved which I did not calculate, to do that I would need to know start date of current loan and exact amount financed, and more importantly, current amount owed, and the exact amount you would borrow if you refinanced (exact to within $1000 is good).

                      Comment


                      • #12
                        Originally posted by mdcrim View Post
                        Could you get a fixed rate home equity loan-Penfed has them at 3.99% for up to 60 months and 4.99% for 60-120 months? You could use the loan to pay off your mortgage (if you have enough equity). These are no-cost loans and would give you the lower interest rate for you to do what you please.
                        This post has me quite intrigued. Sorry to hijack, but what exactly does "no cost loan" mean? Surely, there must be some cost to get this type of loan? Wouldn't an appraisal be required or is that waived in certain circumstances?

                        Comment


                        • #13
                          Originally posted by frugalgirl View Post
                          This post has me quite intrigued. Sorry to hijack, but what exactly does "no cost loan" mean? Surely, there must be some cost to get this type of loan? Wouldn't an appraisal be required or is that waived in certain circumstances?
                          I think this would be more of a personal loan that you would use the money to pay off your mortgage and then you would pay back the personal loan instead of a mortgage.

                          Comment


                          • #14
                            No points, no closing costs. Pulled this off Penfeds website:

                            For all loans with an LTV over 60%, a full appraisal is required regardless of loan amount.
                            For applications with an LTV 60% or less, a tax assessment (in approved counties) or AVM can be used for value, if available. Tax assessments (in approved counties) and AVMs can only be used on loan amounts $250,000 or less.

                            Closing Costs: Pentagon Federal will pay all closing costs associated with the Equity or ELOC loan. Should this loan be paid off or closed within 24 months from the anniversary date of the loan closing, the member will be obligated to pay Pentagon Federal the full amount of the total closing cost for the loan.


                            I'm not actually sure if there are ANY costs associated with the loan. Maybe the appraisal but I know sometimes Penfed covers the cost of those so not sure.

                            Comment


                            • #15
                              I don't know about the Penfed deal specifically, but in general, "no cost" loans just roll the costs into the financing. So the "no cost" loan might have an interest rate that is 25 or 30 or so basis points higher than another loan that does have costs paid separately. No such thing as a free lunch.
                              Steve

                              * Despite the high cost of living, it remains very popular.
                              * Why should I pay for my daughter's education when she already knows everything?
                              * There are no shortcuts to anywhere worth going.

                              Comment

                              Working...
                              X