Author Topic: Should I refinance or pay down principal at the current interest rate?  (Read 10406 times)

Comp281

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Thanks in advance for your help and welcome to my first post (long time lurker).

I am considering refinancing a 30 year mortgage that started in September of 2011 into a 15 year. I have been looking at the math and trying to decide if it is worth it.

I already contribute an extra 1000 towards principal each month (increased this amount recently from 300/mo). I've used mortgage calculators to try to determine if it is worth it to pay 7000 in closing costs in order to reduce the interest rate and the duration of the loan. I'm looking for advice from those that have experience with this. Should I just keep paying the extra 1000/mo towards principal and complete the 30 year loan early? Or should I refinance?

I should also mention that I have been planning to put another 40,000 towards principal at the end of this year if I do not refinance (I had a good year).

Here's more information:

Current Loan Term: 30 years (Started in September 2011)
Initial loan amount: 290,000
Interest rate: 4.375
Currently owe 250,000


Potential Refinance Term: 15 years
Interest Rate: 3.375 or slightly lower

Closing costs: 7,000

Thank you and please let me know if any more information would be useful in determining this.

neo von retorch

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #1 on: December 19, 2014, 11:50:35 AM »
I refinanced twice, from a 30 year @ 6.375% to a 15 year @ 5%, and then to a 15 year @ 3.375%. Each time, the ACTUAL closing costs with my credit union were $1700-1900. (There were higher "amounts" moving around but a large chunk of that was escrows/pre-pays which are not actual costs to you, and ultimately do not affect your net worth.) The savings in interest with each change was ~$200/month so it only took about 10 months each time for the interest to pay for itself. And the payment after the second refinance was almost the exact same as the original 30 year! But a drop in 1% is not huge, and if you are actually spending $7000 in closing costs, I'd skip it. I'd also stop paying down the mortgage and just put your money in long-term investments instead.

Flying Squirrel

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #2 on: December 19, 2014, 12:14:11 PM »
Welcome to the boards! I am a long term lurker... infrequent poster myself.

The best refinance mortgage calculator I have seen is the following:

http://www.zillow.com/mortgage-calculator/refinance-calculator/

I may have made a mistake while inputting your numbers, but it looks refinancing will save you about $50k if you are paying your original mortgage at the normal schedule.

If you are paying down your mortgage with an extra $1,000 a month, I'm not sure how that shifts your existing payment schedule/interest.

Also, after all of my research done online/boards. There seems to be no concrete answer on whether or not you should pay off your mortgage early or put the extra cash into the stock market. You will make more money in the long term if you go with the spare money in the stock market based off of statistical averages. BUT there is a price, which is hard to quantify, for owning your home outright and the peace of mind of not having a mortgage payment.

Personally, I have flip flopped on the idea of putting money in the market vs. paying down the mortgage. I used to think the stock market was the best, but then I realized that by the time I retire early, if I own my home outright, it reduces my annual expenditure significantly and allows my long term capital gains taxes to be 0%. (http://www.bankrate.com/finance/taxes/no-capital-gains-due-for-some-investors-1.aspx)

Good luck either way! This is an excellent problem to have!

Hugerat

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #3 on: December 19, 2014, 01:44:52 PM »
Can you not get a no closing cost refi loan at an interest rate under 4%? 3.375 is a terrific rate, but the $7k closing costs are very high. You should download a mortgage amortization calculator and play around with the numbers. Each .1% reduction in interest rates will be worth several thousand dollars over the life of the loan, but I think you can do better than $7k closing costs.

mginwa

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #4 on: December 19, 2014, 03:07:52 PM »
In the interest of sharing skills, try this to play with and understand your numbers more carefully than you can with an online calculator:

Open Microsoft Excel
At the bottom, where the tabs for different sheets are, right click and choose Insert
Choose Spreadsheet Solutions
then choose Loan Amortization

You then fill in all the terms, including the extra payments, and can see exactly how it all works out over the course of all the different options you're considering.

+1 for all the commenters who think the $7k in fees is far too high, though.
I hope that helps!

neo von retorch

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #5 on: December 19, 2014, 03:51:25 PM »
I blame @blahblah! I was tooling around my credit unions loan application, checking closing costs and debating refi'ing my 15 back to a 30 year (drop my payment by 47% not including taxes/insurance!) and thought I'd just stop on the final page and think about it some more, but each button was "Continue" and before long I was facing "Your application has been submitted." Oops. Well we'll see if it goes through. The main issue is that I've got an apartment now so it's not really my Primary Residence, and I think they want a bunch of discount points (i.e. several thousand dollars extra) to refinance as a rental property. Yuck. So I might just stick with the 15 unless the approval goes through relatively smoothly.

Comp281

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #6 on: December 19, 2014, 06:01:46 PM »
Thank you all for the input. I will contact local credit unions and do some additional research. I have been using the "make extra payments" tab in the calculator linked below to get a rough idea. I will report back after I gather more information.

In response to those advising me to invest in stocks, I would rather have absolutely no debt before I start on that path. I certainly will invest once the mortgage is taken care of.

Thanks again!
Here's that link:
http://www.interest.com/mortgage/calculators/mortgage-calculator/

Comp281

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #7 on: January 06, 2015, 07:08:09 AM »
Update:

I contacted local credit unions and if I refinance to a 15 year I can get a rate of 2.75 or slightly lower but the costs are around 6k to refinance in NY.


Here's the info again so you don't have to go back to the top:

Current Loan Term: 30 years (Started in September 2011)
Initial loan amount: 290,000
Interest rate: 4.375
Currently owe 250,000
Potential refinance term/rate: 15yr/2.75

The part that makes the math a bit complicated is that I can probably pay off about 40k of principal per year with the current loan, or refi to 2.75 (6k cost), drop the interest rate, and put 40k towards principal each year at the new rate.

Because the term of the loan and the amount of interest paid is reduced so dramatically in both cases, it is difficult for me to determine which path to take.

And just to reiterate, I'd like to pay off the mortgage before investing in stocks.
Thanks again for your input!

boarder42

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #8 on: January 06, 2015, 07:39:28 AM »
i have refi'd 4 times all with 0 closing costs.  You get a bit higher rate when you do this but on my last calc.  the rate cost me less than the closing costs.  check around you can find it. 

viper155

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #9 on: January 06, 2015, 07:48:38 AM »
Holy smokes, do NOT spend 7K in closing costs; that is exorbitant.  Check out local credit unions in your area.  Mine is offering a 15 year at 2.875% with no points. APR is 2.92%.  I'm guessing a credit union in your area is offering something similar.  Mine charges about $1400 to refi... not 7 frickin thousand!!!

Four years ago, I started out on a 30 yr at 4.875%... then a year ago, I re-fi'd into a 15 year at 3.375%.  Now,  I'm about to refi back into a 30 year at 3.75%.  Closing costs each time were about $1400. 

While I feel sheepish about changing my mind, I ultimately decided to lock less of my wealth in my house and keep more in the market.  Not only because the returns are traditionally greater, but I'll have more flexibility and I'll also be able to contribute more to tax-deferred accounts.  So make sure you look at it from the tax avoidance angle as well.

I would refi, but please don't spend 7K to do it. What a rip-off.

Edit: attempted screenshot, but failed.  Life goes on :)

Blah, I respectfully request that you consider not going back to a 30 year mortgage. Although you are gaining more at hand cash you are paying the bank SO much more in interest over the years, thus, negating what you set out to do in the first place. If you run the numbers I'm sure the math with astonish you. You are transferring risk back to yourself. Please. Run the numbers and prove me wrong.

neo von retorch

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #10 on: January 06, 2015, 09:49:26 AM »
I contacted local credit unions and if I refinance to a 15 year I can get a rate of 2.75 or slightly lower but the costs are around 6k to refinance in NY.

Did you get a breakdown of the closing costs? My credit union estimates VERY conservatively early in the process... points, higher than actual estimates on any fees, etc. In addition, all of the taxes/insurance is added as prepay amounts, and some of the interest is also added to the closing costs. Of those, only the points and fees are actual costs to you - taxes and insurance end up being a dead zero wash between your old escrow and new escrow and you're already paying interest on the mortgage so paying it at closing doesn't change how much overall interest is paid. And finally, when it actually came to closing, the fees were lower than their early estimates by a significant amount. Again, while the "closing" may have required as much as $5-6k, of that only $1700 was actual costs to me.

Comp281

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #11 on: January 06, 2015, 10:56:25 AM »
I contacted local credit unions and if I refinance to a 15 year I can get a rate of 2.75 or slightly lower but the costs are around 6k to refinance in NY.

Did you get a breakdown of the closing costs? My credit union estimates VERY conservatively early in the process... points, higher than actual estimates on any fees, etc. In addition, all of the taxes/insurance is added as prepay amounts, and some of the interest is also added to the closing costs. Of those, only the points and fees are actual costs to you - taxes and insurance end up being a dead zero wash between your old escrow and new escrow and you're already paying interest on the mortgage so paying it at closing doesn't change how much overall interest is paid. And finally, when it actually came to closing, the fees were lower than their early estimates by a significant amount. Again, while the "closing" may have required as much as $5-6k, of that only $1700 was actual costs to me.

I got a breakdown:

2000 mortgage tax
1200 title insurance (they said this amount could be up to 50% lower because the mortgage originated less than 10 years ago)
420 title search fee
600 recording fee
600 attorney fee
229 underwriting
450 appraisal
6 months tax escrow

neo von retorch

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #12 on: January 06, 2015, 11:25:10 AM »
Ah NY mortgage recording tax definitely takes a big bite! Still, considering your plan to pay off the mortgage within 6 years, and not investing any money until the mortgage is paid off...

It seems like you plan on putting about $4000 towards the mortgage each month. With your current plan, $250k with payments starting 2/1/2015 would get you paid off in 12/1/2020 and you'd pay a total of $34,233.19 in interest.

Putting that same $4000 towards a $256k mortgage with payments starting at 2/1/2015 but at the lower interest rate of 2.75% will have your mortgage paid off a month or two earlier with total interest payments of $21,155.87. With the additional $6k cost, you're still saving $7,077.42 by refinancing. (Obviously this number may be reduced somewhat by changes in tax deductions.)

Comp281

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #13 on: January 06, 2015, 11:37:26 AM »
Ah NY mortgage recording tax definitely takes a big bite! Still, considering your plan to pay off the mortgage within 6 years, and not investing any money until the mortgage is paid off...

It seems like you plan on putting about $4000 towards the mortgage each month. With your current plan, $250k with payments starting 2/1/2015 would get you paid off in 12/1/2020 and you'd pay a total of $34,233.19 in interest.

Putting that same $4000 towards a $256k mortgage with payments starting at 2/1/2015 but at the lower interest rate of 2.75% will have your mortgage paid off a month or two earlier with total interest payments of $21,155.87. With the additional $6k cost, you're still saving $7,077.42 by refinancing. (Obviously this number may be reduced somewhat by changes in tax deductions.)


Thank you for your help. Although it is not a tremendous savings it is still a significant amount. And even if my situation or plan changes, it may be worth doing.

neo von retorch

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #14 on: January 06, 2015, 12:06:54 PM »
Also to keep in mind... right now it looks like your ACTUAL payment is probably something like $1447.93 - you're putting $1000 on top of that for a total of $2447.93 (not $4000!) If you keep those payments consistent, it'll actually take until 10/1/2025 to pay off your mortgage and you'll pay $63,900 in interest.

If you refinance (15 year @ 2.75%) and your new payment is $300 more, so you put $700 additional each month, you'll pay off your mortgage by 2/1/2025 and pay $37,522 in interest. That's a huge $20,377.52 even after the $6000 cost of refinancing.

The faster you pay off this mortgage, the less valuable the lower interest rate will be. If you have less than $4000 available for your TOTAL mortgage payment (including extra) then it's almost certainly worth it to refinance.

Comp281

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #15 on: January 06, 2015, 12:15:35 PM »
^^^ Yes I see what you're saying. Thanks again!

Comp281

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #16 on: February 19, 2015, 12:24:57 PM »
Update:

I've secured a 15 year fixed at 2.5%

As a reminder we're going from a 30 year (27 years remaining) at 4.375 to a 15 year at 2.5

Closing costs will be around 5k. I'm closing at the end of this month. After the refinance is complete I will probably continue putting a little extra towards principal each month - but not nearly as much since we will automatically be paying more principal due to the shorter loan term.

Since I will still have additional savings that I would like to put to work, I am researching real estate investments and other options. Are any of you in the Long Island area that may have some insights about investment properties in the local market? I've been spending some time reading on biggerpockets as well.

Thanks for your thoughts.

boarder42

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #17 on: February 19, 2015, 12:34:47 PM »
man put that money in the market... no need to go towards principal... that 2.5% is under standard inflation... you're basically losing money on that deal

boarder42

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Re: Should I refinance or pay down principal at the current interest rate?
« Reply #18 on: February 19, 2015, 12:35:49 PM »
not to mention the tax deductible interest you're missing out on that makes the 2.5% even lower.