Author Topic: Need help with mortgage refinance math  (Read 2659 times)

Allen

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Need help with mortgage refinance math
« on: April 09, 2014, 04:57:09 PM »
All,

I am considering refinancing and have some questions.

My current loan is for $153,000.  The house used to be appraised higher, but now Zillow says it's worth about $160,000.  I don't know what the actual appraisal would come back at, but I'm assuming I have a 95% loan to value.

My current mortgage is a 30year with about 26 years left, at 4.88% APR rate.  Payment is $883/month for principle/interest.

Considering refinance at 15 year fixed, 3.404 APR - Payment $1,075.08 principle/interest.  Because of the loan to value, I would also have PMI of about $45/month.   Direct costs would be around $2,500 for title, appraisal, etc.

My credit is excellent.

I'm currently maxing out my 401k and HSA, and working on maxing out my IRA (about halfway there for spouse and I).  We have a student loan at 5.125% and $28k left owed on it, that should be paid off in 3 years. 

My plan was to make sure I'm maxing all 401k/IRA/HSA funds and then put any extra to the house to pay it off.  If I don't refinance, the house should be paid off by 2022 at the latest.

My question is, is it worth it to refinance and then NOT pay off the house, keeping the lower interest rate as an inflation hedge?

I'm not sure how to crunch the math on this one and would really appreciate some help on what makes the most financial sense between refi or not, paying off house or not, etc.

Thanks for any insight!


Emg03063

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Re: Need help with mortgage refinance math
« Reply #1 on: April 09, 2014, 06:19:42 PM »
Figure out your marginal tax rate and multiply your refinanced rate by (1-tax rate).  (Assuming you're claiming the mortgage interest deduction).  The result is the return you need to earn in your alternate investment over the time period in question in order to make it worthwhile.  For example, if your marginal tax rate is 25%, you need to earn (3.404*.75), or 2.55%, on average, over the timeframe in question in order for that to be the preferred alternative.  It's a relatively low bar to clear.

TomTX

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Re: Need help with mortgage refinance math
« Reply #2 on: April 09, 2014, 07:59:32 PM »
How fast would your current loan be paid off if you kicked in $2,500 and started paying $1,120/month?

I used a quickie online calculator and it came back with 16.25 years.

The breakeven timeframe on your proposed refi is likely pretty far out there. PMI sucks.

Allen

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Re: Need help with mortgage refinance math
« Reply #3 on: April 10, 2014, 08:29:19 AM »
Sorry I should have posted that I don't clear the hurdle for itemized deductions (I get very close, but almost always end up with the standard deduction), so the mortgage interest deduction isn't a factor for me.

GregO

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Re: Need help with mortgage refinance math
« Reply #4 on: April 10, 2014, 01:11:59 PM »
There's lots of refinance calculators out there that you can run your situation through to see.  I was surprised, but the break even point came out at only 13 months.  So if you can get the loan and PMI you described, it looks like it'd definitely be worth it to refinance.

My question is, is it worth it to refinance and then NOT pay off the house, keeping the lower interest rate as an inflation hedge?

Your second part of the question about whether or not to accelerate the payoff of the mortgage is more of a risk-tolerance / emotional question.  That question comes up for a lot of people and has a lot more factors that affect it.  You'll likely get better returns if you invest the money, but there's no guarantee on that.  Paying off the loan is a guaranteed return, but at a low rate.  Your call.  And don't forget, it doesn't have to be an all-or-nothing approach.  You could put some money towards the loan and invest some every month...

jubilantjill

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Re: Need help with mortgage refinance math
« Reply #5 on: April 10, 2014, 08:35:53 PM »
Mtgprofessor.com has as some great calculators.

Emg03063

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Re: Need help with mortgage refinance math
« Reply #6 on: April 10, 2014, 09:37:35 PM »
Sorry I should have posted that I don't clear the hurdle for itemized deductions (I get very close, but almost always end up with the standard deduction), so the mortgage interest deduction isn't a factor for me.

In that case, your alternate investment simply needs to earn the interest rate.  Unless you expect inflation to exceed the interest rate (which it won't unless the fed loses control of it somehow--their target for inflation is 2%), it's not worth holding the debt simply as an inflation hedge.