Rate modification question

[mdcrim]

So, I bit the bullet and refinanced in 1/10 for a fixed 30 year, 4.5% loan. Loan balance was $350000. My credit union has a rate modification that offers to modify your rate to the current rate for a fee of 1% (current balance of loan is approx $346,000 so 1% is $3460 or so). The rate at my credit union has dropped to 4.125%. This would lower my payments by over $95 per month and would take just over 36 months to recoup the cost. I plan on being in this house forever. Is it worth the hassle and cost to modify the rate?

[disneysteve]

Only you can really decide if it is worth the hassle. If you intend to be in the house for the long term, 36 months isn't all that long to recoup the cost since after that, you'll be saving almost $1,200/year for the life of the loan.

We just applied to refi last night so I know exactly what you mean about the hassle. So far, we've just e-signed stuff and faxed some stuff but I know it won't be that easy.

[jpg7n16]

For the numbers you gave, here is what I calculated:

Your current mortgage should have 351 payments and a balance of $345,789 remaining @ 1,773.40/month
If you refi (to save 95+) it would be 360 payments, same balance @ $1,675.87/month

Current method:
Interest: pay $622,462.90 (351*1773.40) to remove $345,789.14 = $276,673.76 interst
Investing: $0 for 351 months, $1773.40 for 9 months @5% = 16,229.20
Expenses to set up: $0 - can invest 3,457.89 once @5% for 360 months = $15,448.97

Net = -276,673.76 + 16,229.20 + 15,448.97 = -244,995.59

With the refi:
Interest: pay $603,311.82 (360*1675.87) to remove $345,789.14 = $257,522.67 interst
Investing: $97.53 for 360 months @5% = $81,172.20
Expenses to set up: -3,457.89

Net = -257,522.67 + 81,172.20 - 3,457.89 = -179,808.36

Gain by refi over 30 years: $65,187.23 (2,173/year or $181/month)


I think 5% is very reasonable to expect long term. So if you'd invest the difference, you should probably do it.


EDIT: oh wait - sorry, I forgot to account for investing that $97/month. Can't believe I forgot that. Let me add that in hold on.