How long until the refi pays off? Should I do it/check my math.

[Dr.Vibrissae]

Hi all,

After calling once every 4 months or so to check the waters, it seems I am currently eligible to refinance my mortgage at a lower rate. I've been trying to figure out the numbers and whether it is worth doing at this time.  I think it is, but maybe just barely.

Maths:
Current
Balance: ~$99,000
Rate: 4.75%
PMI:74/month (can remove in 3 years if pay early/balance is below ~$85,000)
Principal and interest payment:  $533.84 (~$141 principal, $393 interest)

Refi:
Balance:~$100,723 (includes $1789 in PMI premium)
Costs: $1800 - $910 PMI rebate so ~$900
Rate: 3.25%
PMI:109/month (for at least 5 years)
Principal and interest payment:  $438.39 (I don't have the numbers in front of me, but principal payment goes up to over $200)

Other pertinent info:
-If I wait and decide to refinance later, the PMI rules will be changing and I will be stuck for the life of the loan (unless I can get out of the PMI in the meantime)
-We will be in the house for at least another 3 years, but we may keep it longer
-This is an FHA streamline loan, I'm right on the edge of possibly qualify for a conventional loan, but the interest rate would be ~3.85
-The offer is from Discover loans, I'm still looking into whether there might be a benefit in getting my current lender to refinance

So if I just add the PMI premium, plus closing costs and divide by the difference in payments it looks like it would take me almost 4 years to break even.  That doesn't include accounting for the increased PMI, which I'm not sure how to add in (the difference in costs, plus the potential extra years, damn I don't want to have to make a spreadsheet of various scenarios).

The change would increase the monthly cash flow for other pay downs, but I'm just trying to straighten out in my head if it's worth it at this time.

[Dr.Vibrissae]

I'm feeling very wishy washy.  Now I think maybe I'd be better off focusing solely on shopping around and lowering my insurance (I'm gonna do it anyways).  I'm worried that I'm letting the whole bonanza over even lower rates cloud my head on wether to do this or not.  My rate is already relatively low.  The big if is whether we have the house long enough to reap the benefits.

[jrs]

I won't pretend to know enough to give advice, but I at least wanted to crank out some tables for the two different options.  Always double check the math yourself.  I'm no expert. 

Code: [Select]

balance of 99000 at 0.0475%
 with a payment of: 607.84

(year,month)  to_principle, interest, PMI, balance, payment
(1,  1)    141.965,   391.875, 74,   98858,   607.84
(2,  1)    148.857,   384.983, 74,   97110,   607.84
(3,  1)    156.084,   377.756, 74,   95277.1,   607.84
(4,  1)    163.661,   370.179, 74,   93355.2,   607.84
(5,  1)    171.607,   362.233, 74,   91340,   607.84
(6,  1)    179.938,   353.902, 74,   89226.9,   607.84
(7,  1)    188.673,   345.167, 74,   87011.3,   607.84
(8,  1)    197.833,   336.007, 0,   84688.1,   533.84
(9,  1)    207.438,   326.402, 0,   82252.1,   533.84
(10,  1)    217.508,   316.332, 0,   79697.9,   533.84
(11,  1)    228.068,   305.772, 0,   77019.6,   533.84
(12,  1)     239.14,   294.7, 0,   74211.4,   533.84
(13,  1)     250.75,   283.09, 0,   71266.8,   533.84
(14,  1)    262.923,   270.917, 0,   68179.2,   533.84
(15,  1)    275.687,   258.153, 0,   64941.8,   533.84
(16,  1)    289.072,   244.768, 0,   61547.2,   533.84
(17,  1)    303.105,   230.735, 0,   57987.8,   533.84
(18,  1)     317.82,   216.02, 0,   54255.5,   533.84
(19,  1)     333.25,   200.59, 0,   50342.1,   533.84
(20,  1)    349.429,   184.411, 0,   46238.7,   533.84
(21,  1)    366.393,   167.447, 0,   41936.1,   533.84
(22,  1)     384.18,   149.66, 0,   37424.6,   533.84
(23,  1)    402.831,   131.009, 0,   32694.1,   533.84
(24,  1)    422.388,   111.452, 0,   27733.9,   533.84
(25,  1)    442.894,   90.9461, 0,   22533,   533.84
(26,  1)    464.395,   69.4445, 0,   17079.5,   533.84
(27,  1)    486.941,   46.8991, 0,   11361.3,   533.84
(28,  1)    510.581,   23.2592, 0,   5365.42,   533.84
total interest paid: 79984.1
total PMI paid: 6216
total time: (28y, 0m)


Code: [Select]

balance of 100723 at 0.0325%
 with a payment of: 547.39

(year,month)  to_principle, interest, PMI, balance, payment
(1,  1)    165.599,   272.791, 109,   100557,   547.39
(2,  1)    171.061,   267.329, 109,   98534.9,   547.39
(3,  1)    176.704,   261.686, 109,   96445.7,   547.39
(4,  1)    182.534,   255.856, 109,   94287.5,   547.39
(5,  1)    188.555,   249.835, 109,   92058.1,   547.39
(6,  1)    194.775,   243.615, 109,   89755.3,   547.39
(7,  1)    201.201,   237.189, 109,   87376.4,   547.39
(8,  1)    207.838,   230.552, 109,   84919.1,   547.39
(9,  1)    214.694,   223.696, 109,   82380.7,   547.39
(10,  1)    221.777,   216.613, 0,   79758.5,   438.39
(11,  1)    229.093,   209.297, 0,   77049.9,   438.39
(12,  1)     236.65,   201.74, 0,   74251.9,   438.39
(13,  1)    244.457,   193.933, 0,   71361.6,   438.39
(14,  1)    252.521,   185.869, 0,   68375.9,   438.39
(15,  1)    260.852,   177.538, 0,   65291.8,   438.39
(16,  1)    269.457,   168.933, 0,   62105.9,   438.39
(17,  1)    278.346,   160.044, 0,   58815,   438.39
(18,  1)    287.528,   150.862, 0,   55415.4,   438.39
(19,  1)    297.013,   141.377, 0,   51903.8,   438.39
(20,  1)    306.811,   131.579, 0,   48276.2,   438.39
(21,  1)    316.932,   121.458, 0,   44529,   438.39
(22,  1)    327.387,   111.003, 0,   40658.2,   438.39
(23,  1)    338.187,   100.203, 0,   36659.7,   438.39
(24,  1)    349.344,   89.0464, 0,   32529.3,   438.39
(25,  1)    360.868,   77.5221, 0,   28262.7,   438.39
(26,  1)    372.772,   65.6176, 0,   23855.2,   438.39
(27,  1)     385.07,   53.3204, 0,   19302.4,   438.39
(28,  1)    397.773,   40.6175, 0,   14599.4,   438.39
(29,  1)    410.894,   27.4956, 0,   9741.31,   438.39
(30,  1)    424.449,   13.9408, 0,   4722.91,   438.39
total interest paid: 57074.8
total PMI paid: 11554
total time: (30y, 0m)

There are so many scenarios we could consider, But at least I want to run one hypothetical.  What if you refinance, but continue to make your current payments of $607 anyways? 

Code: [Select]

balance of 100723 at 0.0325%
 with a payment of: 607.84

(year,month)  to_principle, interest, PMI, balance, payment
(1,  1)    226.049,   272.791, 109,   100497,   607.84
(2,  1)    233.506,   265.334, 109,   97736.1,   607.84
(3,  1)    241.209,   257.631, 109,   94884.3,   607.84
(4,  1)    249.166,   249.674, 109,   91938.3,   607.84
(5,  1)    257.385,   241.455, 109,   88895.1,   607.84
(6,  1)    265.876,   232.964, 109,   85751.6,   607.84
(7,  1)    274.647,   224.193, 109,   82504.4,   607.84
(8,  1)    393.893,   213.947, 0,   78602,   607.84
(9,  1)    406.887,   200.953, 0,   73791.3,   607.84
(10,  1)    420.309,   187.531, 0,   68821.8,   607.84
(11,  1)    434.175,   173.665, 0,   63688.4,   607.84
(12,  1)    448.497,   159.343, 0,   58385.7,   607.84
(13,  1)    463.293,   144.547, 0,   52908,   607.84
(14,  1)    478.576,   129.264, 0,   47249.7,   607.84
(15,  1)    494.363,   113.477, 0,   41404.7,   607.84
(16,  1)    510.672,   97.1682, 0,   35366.8,   607.84
(17,  1)    527.518,   80.3219, 0,   29129.8,   607.84
(18,  1)     544.92,   62.9199, 0,   22687,   607.84
(19,  1)    562.896,   44.9438, 0,   16031.7,   607.84
(20,  1)    581.465,   26.3747, 0,   9156.87,   607.84
(21,  1)    600.647,   7.19298, 0,   2055.22,   607.84
total interest paid: 39114.1
total PMI paid: 8720
total time: (20y, 5m)


[Dr.Vibrissae]

jrs, thanks, those are really cool charts.  My original plan actually was to continue to pay the same amount each month with the lower payment to build more equity without much pain, then I thought it might be wiser to take the money and use it for a deferred, but non-subsidized student loan at 6.8%.

I think I did not properly articulate the source of the angst over this refi.  Obviously if we own the house for longer than 3-4 years after this, we will come out ahead.  The trouble is, it's not 100% certain that we will keep the house when I finish, and if we don't then I have tied up the closing costs in the short term when I could (maybe should anyways) use them to finish paying off other loans.  I keep discussing this at the MR. and he laughs because flip flopping is a known MO for me when it comes to biggish decisions.  He's not much help otherwise in the financial analysis department, other than being supportive, so I don't really know where to take my anxiety and lay it all out.

[Mr Mark]

Try on the market and see what rates are for a zero cost refi. If they are higher, forget it. If the rates are lower, do it. You might save 1 interest payment during the refi too.... which is a nice bonus.

[spin]

So if I just add the PMI premium, plus closing costs and divide by the difference in payments it looks like it would take me almost 4 years to break even.  That doesn't include accounting for the increased PMI, which I'm not sure how to add in (the difference in costs, plus the potential extra years, damn I don't want to have to make a spreadsheet of various scenarios).

I'd look at the worst case scenario.  PMI for 1 year on existing loan and 5 years on the re-fi and assume it's part of the refi cost since it not ongoing.  I'm not taking into the future value of money since it's only 5 years.

e.g.
Current payment:$533.84
Future payment: $438.39
difference: $94.45
Closing $1800 - $900 (pmi discount) + 5 yr*12m/yr*109 (new PMI) - 1yr*12m/yr*74 (old PMI) = $6552
Time to parity = $6552/$94.45 ~ 69 mo (5 yr 8 mo).

Best case scenario PMI for 2 years on either loan
Closing $1800 - $900 (pmi discount) + 2 yr*12m/yr*109 (new PMI) - 2yr*12m/yr*74 (old PMI) = $1740
Time to parity = $1740/$94.45 ~ 18 mo.


Looking at the loan I'm guessing you're a little over a year into the loan and $95.45 extra pays off the loan almost 8 years early (7 faster than current).  In the worst case scenario then it's only a ~ year faster (5yr PMI vs 1yr on old load).

[Starstuff]

Hold please. This isn't nearly enough information. What is your house worth? What are your credit scores? Why FHA and not conventional? Have you considered an adjustable rather than fixed product since you'll probably only have the house a few years? Have you considered that with PMI, you're paying an effective rate of 5.125% rather than taking a conventional loan at 3.85%? Have you considered a split loan or HARP refinance if you have more than 80% LTV? Have you had an appraisal in the last six months that confirms that you'll need PMI at all?

FHA is probably not the best answer to this. Barring exceptional circumstance, this refi is not a good idea. If you can answer the above questions, I can give a better answer.

[Dr.Vibrissae]

Well, after thinking and doing other number manipulations, I had already decided against continuing with the refinance.  However I appreciate having other people think about my issues, incase I missed and angle. 

So for Starstuff (thanks for the input) and any others, here is further info:
House worth ~$105,000 assuming no change invalue since the purchase 2yrs ago (I have not had a more recent appraisal)

Credit scores: 746 and 769

FHA instead of conventional because I do not have that much equity, so most conventional loans are out.

I had not considered an adjustable rate, and it is unclear how long we will keep the home.  We've discussed renting it in the future, or just selling it to the company that recently bought all the other houses on our little cul-de-sac.

I have considered that the effective rate is much higher than the actual rate and by refinancing with an FHA, I will be locking myself into it for an additional 2 years.  This is part of the reason I decided against it.  I originally just called to see what my options were and I think I was getting caught up in the nominally low rates, but I don't think its the best solution right now.