Author Topic: Mortgage Refinance Question  (Read 3414 times)

MSC

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Mortgage Refinance Question
« on: December 31, 2014, 09:49:45 AM »
Good Morning / Happy New Year:

My wife and I have been looking to refinance our $105,000 @ 5.25% mortgage in hopes of saving some money and possibly consolidating to pay down debt. I think my spreadsheet speaks for itself, but I was a little surprised that the lowest cost option is to refinance with no cash out over 15 years. I'm not a financial wizard by any means, so is there anything that I'm missing in my calculations? The $30-40k cash out options would pay off all of our other debt, freeing up $684/month for savings or more prepay, and the extra $10-15k would be to have a cash reserve for emergencies, etc.

Thoughts, suggestions, tips?

« Last Edit: December 31, 2014, 10:11:02 AM by MSC »

neo von retorch

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Re: Mortgage Refinance Question
« Reply #1 on: December 31, 2014, 10:56:50 AM »
The main thing I see is that you have a constant pre-payment + mortgage payment total of $1147. However, if you take cash out and pay off a student loan (for example, it makes the most sense to take out $12800 and pay off the 5.75% student loan, assuming the tax deduction on that interest is insignificant or you do not qualify) then your prepayment amount should go up by $225.79 to include the freed up student loan payment.

MDM

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Re: Mortgage Refinance Question
« Reply #2 on: December 31, 2014, 12:24:27 PM »
Interesting problem.  Without seeing the details it's tough to give specific answers.  E.g., have you already accounted for neo's suggestion?

It's not unreasonable that minimizing your interest cost on your large loan becomes more important than paying off the smaller but higher interest loans.  Can't provide a one-size-fits-all rule, other than "run the numbers" as you are doing.

MSC

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Re: Mortgage Refinance Question
« Reply #3 on: December 31, 2014, 02:35:40 PM »
Here's what each one looks like after 10 years, assuming the extra money from the cash out pays off the debt immediately, and the extra money from the $15k cash out pays off the second two loans (easier math). Paying minimum payments on the non-mortgage debt and converting the monthly payments into savings turns in to $51,000 at the 10 year mark.

This is of course assuming no interest on anything other than debt.

Might there be an advantage to have everything paid off in 90 months (7.5 years) as in the second scenario? Would I start earning compound interest faster?

Any other variables I should be considering?

« Last Edit: December 31, 2014, 02:37:47 PM by MSC »

Catbert

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Re: Mortgage Refinance Question
« Reply #4 on: December 31, 2014, 02:43:14 PM »
I would never suggest rolling a car loan into a mortgage.  That's just a way of paying for a car over 15 years!  Or 30 years!  Long after the car is a distant memory.

Also remember that there are many flexibilities built into SLs (at least some of them).  If you lose a job, become disabled, or die your mortgage company doesn't care.  Your SL has more flexibility.

MSC

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Re: Mortgage Refinance Question
« Reply #5 on: December 31, 2014, 02:55:05 PM »
I would never suggest rolling a car loan into a mortgage.  That's just a way of paying for a car over 15 years!  Or 30 years!  Long after the car is a distant memory.

Also remember that there are many flexibilities built into SLs (at least some of them).  If you lose a job, become disabled, or die your mortgage company doesn't care.  Your SL has more flexibility.

Good call on the car loan--I did some quick math and depending on the payback period it ends up being $500-1200 more in interest!

I think you're on track with the student loan stuff, except for the death part--or so Iv'e been told.

MDM

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Re: Mortgage Refinance Question
« Reply #6 on: December 31, 2014, 03:52:00 PM »
Here's what each one looks like after 10 years, assuming the extra money from the cash out pays off the debt immediately, and the extra money from the $15k cash out pays off the second two loans (easier math). Paying minimum payments on the non-mortgage debt and converting the monthly payments into savings turns in to $51,000 at the 10 year mark.

This is of course assuming no interest on anything other than debt.

Might there be an advantage to have everything paid off in 90 months (7.5 years) as in the second scenario? Would I start earning compound interest faster?

Any other variables I should be considering?

For the general topic, see http://forum.mrmoneymustache.com/ask-a-mustachian/reader-case-study-refinance-or-not-to-refinance-that-is-the-question/ for remarks on a similar strategy.  Many pitfalls to consider....

You may be doing this already, but if not here's one way to approach the question:
1.  Pick a fixed amount per month that you will put toward loan repayment and investment. 
2.  Allow for monthly and/or one time principal prepayments if the loans allow.
3.  Assign an investment return percentage to any money not going to loan repayment.
4.  Run all scenarios for the same number of months.  That number should be enough to ensure all loans are fully paid.  Determine resulting investment balances.
5.  Evaluate scenario rewards vs. risks.  Go from there.

Spondulix

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Re: Mortgage Refinance Question
« Reply #7 on: January 01, 2015, 01:07:14 AM »
Why not a 30 year loan with extra cash?

I'd stay away from the 15 year loans, only because you're unnecessarily tying up money that has to go towards a mortgage payment - especially when the interest rates are that close. If you get a 30 year loan and make an extra principal payment every month, you basically turn it into a 15 year loan. The difference is that you have the flexibility of not making that extra payment (in case of emergency, life change, etc).

In terms of the chart, "interest saved" is only applicable if the loans are paid on schedule (vs paying ahead). So it's not really accurate to compare. Having a lower payment just means you have more money free to put towards principal in whatever way you choose. The other thing not being taken account is the amount that will be saved just in the refinance! The money saved right there is probably more than the comparison you're trying to do!

I wouldn't evaluate this as "where will I save the most money over the life of the loan" cause there are unknowns. I'd focus on how to best get your rates down without tying up all of your cash in payments that have to be made every month. Personally, I might cover student loan #1 in the refi - there's not many ways to lower rates (unless you think you'll qualify for some sort of loan assistance in the future per law changes).

clifp

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Re: Mortgage Refinance Question
« Reply #8 on: January 01, 2015, 01:24:48 AM »
If you really can find a 30 year mortgage for 3.375 that would be a good deal.  Most places I've looked are 3.875 or 4%.
Assuming you can easily handle the payments, and you can take advantage of itemize deductions.  My rule of thumb would be if the interest rate is less than .5% difference go for the 30 year, if it is over 1% go for 15 years. Between .5% and 1% it is really a personal preference.