Check my math - refinancing the mortgage

[meerkat]

We're looking into possibly refinancing our mortgage but I'm not sure if the numbers make sense.

Current mortgage:
Began 10/09 for $120,000 @ 4.99%. 30 year fixed.
We always paid extra so we're currently sitting at about ~$92,000 remaining principle.
Monthly payment owed is $643, I think we've been paying ~$250 extra to the principle each month lately but that has varied over time.
Remaining interest we'd be paying if we stuck with this loan, including extra principle payments: $35,489.55

Potential new mortgage:
Adding an estimated 5% in fees, $92,000+$4,600 = $96,600 loan value
Estimated interest rate* is 3.625%, also 30 year fixed.
Monthly payment owed looks like it'll be $440.55 according to the Excel loan calculator.
We would still do extra payments each month. If we kept paying the same ($643+$250 = $893) we'll be doing a double payment ($440+$453 = $893)
Total interest we'd be paying without extra payments: $61,996.40
Total interest we'd be paying with extra payments: $20,618.55


[interest paid currently on loan]$35,849.55 + [interest to be paid on future loan]$20,618.55 = $56,468.10
[total interest on current loan] $56,031.97
Which ... doesn't really make it seem worth it.

Is there anything I'm missing? I called our credit union and he gave us an estimated rate off what I told him my credit score was and he had the refinancing half way set up in twenty minutes, the only snag at this point is that I have a freeze on my credit and would have to call to get it lifted for the month if we wanted to move forward with the refi.

[mozar]

Since you pay extra anyway what rate can you get for a 15 year loan?

[frugaliknowit]

Step#1:  Add up all of the costs of the Refinance (Say $2500...?)

Step #2:  Calculate your break even point (at what point in time will your interest savings equals the costs of the refinance).  4.99-3.625=1.3625% times 92,000 equals roughly $1253 per year or $105 per month.  If the costs are $4600 (seems high... I am thinking it should be more like $2500...?), your break even is ROUGHLY 4 years (at $2500 it's more like 2 years)....   A more precise way is compare your current amortization table to a new amortization table you create and compare the two.  Your loan broker should be able to do this for you.
 
Step #3:  If you plan to keep your home later than the break even point, do the refi.  If not, skip it.

As Mozar mentioned, why not switch to 15 year since it should be a much lower rate (below 3%) and you are already paying extra on the 30 year...?  The lower rate will make an earlier break even point!

[FIREdancer]

Since you pay extra anyway what rate can you get for a 15 year loan?

+1 Get a 15 year and save even more on interest.

[meerkat]

Thanks! I put a call in to the guy at the credit union asking about what the interest rate would be for a 15 year mortgage, haven't heard back yet.

[neo von retorch]

And shop around! I love my credit union, and I ended up refinancing to them, and getting a mortgage with them on my second home... but I also did some comparisons. Our total cost for the refinance was about $1700. Make sure you understand the cost breakdown. Some things are not costs. For example: filling the escrow on the "new" mortgage, pre-paying interest before your first mortgage payment, etc. But there are fees as well. The total amount due or rolled into the new mortgage is not the exact amount of the total refinance fees. Given what I paid, I would not think anything over $2000 in fees is a good deal.

(And be sure you want to pay your mortgage early - there are plenty of discussions about whether or not it's a good idea. It's not always a good idea. Be sure to understand that before you make your decisions. In my opinion, it's better to have a sub-4% 30 year mortgage that you don't pay early.)

[SwordGuy]

[interest paid currently on loan]$35,849.55 + [interest to be paid on future loan]$20,618.55 = $56,468.10

Huh???

Why would you double count the interest?  Regardless of whether you keep your current loan or switch to a new one, you only pay interest for one of them.

And consider a 15 year to get a better rate since you're planning on paying it off faster anyway.

[meerkat]

[interest paid currently on loan]$35,849.55 + [interest to be paid on future loan]$20,618.55 = $56,468.10

Huh???

Why would you double count the interest?  Regardless of whether you keep your current loan or switch to a new one, you only pay interest for one of them.

And consider a 15 year to get a better rate since you're planning on paying it off faster anyway.

Different time periods. Rephrasing:
[interest paid on current loan from the time of inception to present]$35,849.55 + [interest to be paid on future loan from present day till the end of the loan]$20,618.55 = $56,468.10

[robartsd]

Different time periods. Rephrasing:
[interest paid on current loan from the time of inception to present]$35,849.55 + [interest to be paid on future loan from present day till the end of the loan]$20,618.55 = $56,468.10

I read it the same way because $35,489.55 is what you listed as the interest remaining under your current repayment estimates near the top of your post. Somewhere your numbers don't make sense - at the top of your post, refinancing seems to save you about 15k, but near the end it is negligible.

[meerkat]

Heard back from the mortgage guy with 2.75% at fifteen years.

Current mortgage, to recap:
Began 10/09 for $120,000 @ 4.99%. 30 year fixed.
We always paid extra so we're currently sitting at about ~$92,000 remaining principle.
Monthly payment owed is $643, I think we've been paying ~$250 extra to the principle each month lately but that has varied over time.
Remaining interest we'd be paying if we stuck with this loan, including extra principle payments: $35,489.55

Potential new fifteen year mortgage:
Adding an estimated 5% in fees, $92,000+$4,600 = $96,600 loan value
Estimated interest rate is 2.75%, 15 year fixed.
Monthly payment owed looks like it'll be $655.55 according to the Excel loan calculator.
Extra payments would be $238/month
Total interest we'd be paying without extra payments: $21,398.73
Total interest we'd be paying with extra payments: $14,529.16

[interest already paid on current loan]$35,849.55 + [interest to be paid on future loan]$14,529.16 = $50,378.71
[total interest on current loan for the full 30 years] $56,031.97

Step#1:  Add up all of the costs of the Refinance (Say $2500...?)

My estimate of the costs for the refi are the number the guy said off the top of his head as "they could go as high as" so this is another thing that will need to be firmed up when I move forward with the paperwork. For now I'm just using it as a placeholder.

Step #2:  Calculate your break even point (at what point in time will your interest savings equals the costs of the refinance).  4.99-3.625=1.3625% times 92,000 equals roughly $1253 per year or $105 per month.  If the costs are $4600 (seems high... I am thinking it should be more like $2500...?), your break even is ROUGHLY 4 years (at $2500 it's more like 2 years)....   A more precise way is compare your current amortization table to a new amortization table you create and compare the two.  Your loan broker should be able to do this for you.

4.99%-2.75%= 2.24%
2.24%*$92,000=$2,060.80
$2,060.80/180 months = $11.45 per month?
You lost me after that with the numbers, and I can certainly bug the loan broker like you said, but it looks like the jist of it is that we wouldn't need to be here that much longer at all to justify the 15 year mortgage.

[meerkat]

Different time periods. Rephrasing:
[interest paid on current loan from the time of inception to present]$35,849.55 + [interest to be paid on future loan from present day till the end of the loan]$20,618.55 = $56,468.10

I read it the same way because $35,489.55 is what you listed as the interest remaining under your current repayment estimates near the top of your post. Somewhere your numbers don't make sense - at the top of your post, refinancing seems to save you about 15k, but near the end it is negligible.

Yeah that's part of why I posted here. Math is not my strong suit but I can chase details till the cows come home, the problem is when I get in my own way. :/

Edit: this may not help, but to look at future payments only:
Current 30 year: $20,879.23
30 year refi: $20,618.55 (savings of $260.68)
15 year refi: $14,529.16 (savings of $6,350.07)

(And because there aren't enough numbers flying around already, I looked at how much interest we'd pay over the life of the original loan if we never did any extra payments or refinancing and it was almost $112k! Almost as much as the original principle amount! Nooooo thank you!)

[James]

Shop around, compare rates and closing costs. Closing costs shouldn't be 5%. 2.75% sounds good for a 15 year, you can afford the monthly payment so 15 year is perfect, now just find the best deal in both closing costs and rate. The math is important, but if dropping a couple percent and shopping around to keep closing costs as low as possible, you really don't need to do the math and have exact numbers. You know it is worth it at that point so exact savings isn't really relevant to the decision itself.

[robartsd]

(And because there aren't enough numbers flying around already, I looked at how much interest we'd pay over the life of the original loan if we never did any extra payments or refinancing and it was almost $112k! Almost as much as the original principle amount! Nooooo thank you!)

This is with good interest rates. When interest rates are high, people paying according the the amortization table of a 30 year loan might pay closer to twice as much in interest as they do in principle over the life of the loan. Just like in calculating a SWR, 30 years of compounding is almost forever.

[Simpli-Fi]

Got to drop some MMM point of view I read on the mortgage payoff thread to play devil's advocate.  Instead of calculating interest saved calculate stash not growing because of extra payments.  30 years hedged at 3% sure looks easy to beat buying indexed funds.

Only reason I bring it up, is because I was enlightened the other day...and like you, paying money for not having money seems rediculous, except if you can beat the odds of low interest rates.  Original $112k in interest...vs $250 monthly for 30 years earning 3% compounded is $145k; you are losing over $30k of stash.

[mtn]

Maybe I'm not good at math, but I fail to see how it isn't a good idea to refinance.

You're making it too complicated. What is your total interest remaining to be paid with the current mortgage, including the extra payments? If I'm reading correctly, it is $35k. A new 30 mortgage will have $20k for the interest, including extra payments.

15 year is even better.

But even then, I'd probably go for the 15 year and not make extra payments. Stick it in the market.

[meerkat]

Maybe I'm not good at math, but I fail to see how it isn't a good idea to refinance.

Yeah I think that's point I'm at now. I just remember last time we looked at refinancing it we thought it was for sure a good deal and it turned out not to be. In hind sight I think we were probably looking at it the wrong way. Definitely before MMM!

Got to drop some MMM point of view I read on the mortgage payoff thread to play devil's advocate.  Instead of calculating interest saved calculate stash not growing because of extra payments. 

Definitely a good point, but I'm not sure I can convince my other half to drop that much cash in one go. I only just opened up an IRA this year and I'm working on getting him to open up an IRA so investing is still kind of new and "scary", so the idea of our stash growing by some means other than our paycheck hasn't quite sunk in yet.

I'm moving forward with shopping around for rates today and gathering the last bits of information for the loan application.

[meerkat]

Follow up question - I know the people trying to sell me the mortgage want me to sign up right away, but is there any reason I shouldn't wait till next week? We've got some other life stuff going on this week so having the weekend to talk about it would be helpful. Like is the fed about to announce if they're going to change interest rates or anything?

[robartsd]

Follow up question - I know the people trying to sell me the mortgage want me to sign up right away, but is there any reason I shouldn't wait till next week? We've got some other life stuff going on this week so having the weekend to talk about it would be helpful. Like is the fed about to announce if they're going to change interest rates or anything?

Waiting, you risk rates going up; signing now, you risk rates going down. I'd talk to a few potential brokers letting them know you plan to make a decision at a specific time on Monday. Get estimates from them on Friday. Discuss the estimates over the weekend. Confirm the rates on Monday and make your final decision. The next Fed board meeting is in September.

[Giro]

How long will you be staying in the house?  You need to calculating the breakeven point on the fees to see if it's worth it.

Numbers look good, just need to know estimated sell date of the home. 

[meerkat]

How long will you be staying in the house?  You need to calculating the breakeven point on the fees to see if it's worth it.

At least two years, probably longer than that. We have no plans to leave the area for the foreseeable future.