House Refinance Question

[uspsfanalan]

I have been considering refinancing my home and I'm trying to make sure I haven't missed something. There are two ways I have been trying to calculate how many months it would take to break even on the refinance. My wife and I are considering moving back home, but I’m taking some accounting courses here and we both just started new jobs. We’d like to stay here for at least one more year. We’re really not sure if we would stay longer than that I would entirely depend on our job situation, if we have children etc.

Here are the details of the loans.

House loan 145,000 at 5%, 30 year mortgage.
New loan at 137,360 for 3.25 – 15 year mortgage.

(137,360) (.0175) = 2403 per year saved in interest costs
Closing costs between inspection, title search etc. 3374
Basically 16 months and I would break even.

Alternative projections.
   Current Loan     15 yr loan
Principal   201     593
Interest   589     372
Total     790     965
      
12months Principal payment   2412   7116

I my monthly payment per month will be 150 per month higher totaling 1800

  7116
- 1800 because this isn’t really savings, just more money out of my pocket.
- 2412 because this is the principal I was paying down before.
= 2904 additional yearly principal payment

3374 /2904  = 1.16 = 14 months to break even point. 

Which way is more valid?

When I started this post I found an error that had made the difference I was considering much bigger. Now that it is so similar, its kind of mute point. If anyone has further suggestions of a different way of looking at it I would be interested to hear it.

[velocistar237]

I would just use this (if it works; it looks broken right now, though I've used it before). The form will at least give you an idea of what to consider.
http://www.mtgprofessor.com/calculators/Calculator3a.html

You'll need to factor in return on investments in order to account for opportunity cost. You can play with the break-even point given different rates of return.

If you want to do it yourself, then create a spreadsheet to track the costs and the expected investment returns month by month. Subtract the two scenarios and look for the crossover point.

[tooqk4u22]

Check the model suggested above but in some regard you are comparing apples and oranges - 30 year vs. 15 year and two different loan amounts.  To make it more apples to apples the base scenario you should assume is that you pay down your existing mortgage $137,360 and make payments based on a 15-year schedule at the 5%.  Ignore opportunity cost for now and tax implications.  Based on this it would take 17 months to breakeven. If you are only staying there another year it is not worth it so pay down the loan and make higher monthly payments...that said time has a way of getting away from you and one year can quickly turn in to three in that case it would be worth it.

The best of both worlds given your timing would be to blend it into the rate (not the loan amount) in this case you would pay a higher rate which would be about 3.65% to get enough of a credit from the lender to cover the closing costs.  Best part is if you move in 12 months they eat it. 

[uspsfanalan]

Thank you both for responding. The calculator is quite helpful. Additionally just putting it in writting has really helped me get a better handle on figuring it out.

[salmp01]

I agree with tooqk4u22’s point about blending it into the rate.  Ask around for a no cost refi.  This morning I just refinanced my home and it didn’t cost me a dime.  My rate was 3.95% for a 30 year.

[uspsfanalan]

Thanks for the tip, I will check that out as well.