# Math is fun. Mortgage refinance question!

June 24, 2009 6:28 PM Subscribe

Generally good with numbers; but mortgage refinance has my head spinning.

I'm looking to refinance my 30-year mortgage to a 15-year. The more I calculate, the more confused I get. What is my best option?

Personal details: I'm unmarried, income $45,000 pretax, credit score 782.

Mortgage details: Bought a house 12/2007 for $173,000. 30-year mortgage at 5.875%, 20% down at closing. House currently valued at $173,500.

Financial details: I have approx $16,000 available in savings (which I won't be touching), but I have a CD that matures in July for $25,000 which I will be using to pay down the principal. I can swing paying around $1600/month toward the mortgage.

Monthly payment (principal/interest/escrow) is $1050. I've been able to add $500 additional principal per month, every month since the start of the loan, so my current principal balance is about $128,000.

Should I:

1. Keep on keepin' on at 5.875% for 30 years, apply a one-time $25,000 to the principal, and $500 extra per month; or

2. Refinance $128,000 at the best rate I can find (I locked in Wells Fargo at 4.875% with one point while I continue to shop around), pay the $3000 (I guesstimate) toward closing costs, and THEN pay down the principal by $25,000, continuing to add additional principal per month (up to a $1600/month payment); or

3. Pay down the principal by $25,000 FIRST, then do all of the above in option 2; or

4. another option I may not have even considered?

My wallet thanks you in advance. Posted anonymously simply to protect financial specifics.

I'm looking to refinance my 30-year mortgage to a 15-year. The more I calculate, the more confused I get. What is my best option?

Personal details: I'm unmarried, income $45,000 pretax, credit score 782.

Mortgage details: Bought a house 12/2007 for $173,000. 30-year mortgage at 5.875%, 20% down at closing. House currently valued at $173,500.

Financial details: I have approx $16,000 available in savings (which I won't be touching), but I have a CD that matures in July for $25,000 which I will be using to pay down the principal. I can swing paying around $1600/month toward the mortgage.

Monthly payment (principal/interest/escrow) is $1050. I've been able to add $500 additional principal per month, every month since the start of the loan, so my current principal balance is about $128,000.

Should I:

1. Keep on keepin' on at 5.875% for 30 years, apply a one-time $25,000 to the principal, and $500 extra per month; or

2. Refinance $128,000 at the best rate I can find (I locked in Wells Fargo at 4.875% with one point while I continue to shop around), pay the $3000 (I guesstimate) toward closing costs, and THEN pay down the principal by $25,000, continuing to add additional principal per month (up to a $1600/month payment); or

3. Pay down the principal by $25,000 FIRST, then do all of the above in option 2; or

4. another option I may not have even considered?

My wallet thanks you in advance. Posted anonymously simply to protect financial specifics.

Hi,

I did some calculations assuming that you pay down $25,000 (which I think you should do right now at any rate) and here's what I came up with:

After the 25k infusion leaving a balance of $103,000 on your mortgage and $1650 in payments every month, at 5.875% interest you'll have your mortgage paid off in 71 months and 12 days.

At 4.875%, that number drops to 69 months and 18 days. So, you shave roughly two months off of your loan term by going with Wells Fargo. That two months of payments equals $3300 saved...but it's going to cost you $3000(you hope) in closing costs just to get that new loan anyway. So, if you get a closing cost estimate that's more than $3300 then it's pointless to switch loans.

IMO, you ought to continue with what you're doing now. Awesome job getting your home paid off so quickly, BTW.

posted by Biglew at 7:01 PM on June 24, 2009

I did some calculations assuming that you pay down $25,000 (which I think you should do right now at any rate) and here's what I came up with:

After the 25k infusion leaving a balance of $103,000 on your mortgage and $1650 in payments every month, at 5.875% interest you'll have your mortgage paid off in 71 months and 12 days.

At 4.875%, that number drops to 69 months and 18 days. So, you shave roughly two months off of your loan term by going with Wells Fargo. That two months of payments equals $3300 saved...but it's going to cost you $3000(you hope) in closing costs just to get that new loan anyway. So, if you get a closing cost estimate that's more than $3300 then it's pointless to switch loans.

IMO, you ought to continue with what you're doing now. Awesome job getting your home paid off so quickly, BTW.

posted by Biglew at 7:01 PM on June 24, 2009

Biglew and my payment calculations differ because the escrow amount is unknown. I calculated at $150-250.

If you want to run these numbers yourself, you can play on a Google docs spreadsheet (or excel). The function i used was the NPER function. Enter this into a cell and it'll tell you how many payments you'll make:

=NPER(4.875%/12,-1400,103000,0)

That reads

NPER (calulate the number of periods in this loan)

with a 4.875 annual rate (which compounds monthly - hence the /12, this is the RATE)

a $1400 payment (the PMT)

a present value (PV) of $103,000

and a future value (FV) of $0 (meaning paid for)

with the payment happening at the end of the month (this changes things just slightly if you make this a 1, which indicates its at the beginning of the month, like car loans)

You can also hit any number of amortization calulators to play with what the extra payments will do the loan. The one at bank rate works well.

Again, congratulations!

posted by bensherman at 7:12 PM on June 24, 2009

If you want to run these numbers yourself, you can play on a Google docs spreadsheet (or excel). The function i used was the NPER function. Enter this into a cell and it'll tell you how many payments you'll make:

=NPER(4.875%/12,-1400,103000,0)

That reads

NPER (calulate the number of periods in this loan)

with a 4.875 annual rate (which compounds monthly - hence the /12, this is the RATE)

a $1400 payment (the PMT)

a present value (PV) of $103,000

and a future value (FV) of $0 (meaning paid for)

with the payment happening at the end of the month (this changes things just slightly if you make this a 1, which indicates its at the beginning of the month, like car loans)

You can also hit any number of amortization calulators to play with what the extra payments will do the loan. The one at bank rate works well.

Again, congratulations!

posted by bensherman at 7:12 PM on June 24, 2009

one thing to ponder: if you can lock in a term deposit (or any other instrument you're happy with the risk profile of) at a greater rate than you're paying off the mortgage, the $25k should be invested. Otherwise, throw it at the mortgage.

posted by polyglot at 9:58 PM on June 24, 2009

posted by polyglot at 9:58 PM on June 24, 2009

The above advice is fine on paper, but is bad advice.

A paid for house in 7 years means you won't have any obligations. Your grass will feel better on your feet when you walk across you l;awn. Your job will take on new meaning because you can walk away any time. You have a 0% chance of getting foreclosed on. You won't pay taxes on gains of the other instrument. You won't be at risk of the other instrument being worthless.

Debt free is the best feeling in the world, and that's better than a 1 or 2% taxed arbitrage.

posted by bensherman at 6:42 AM on June 25, 2009 [1 favorite]

A paid for house in 7 years means you won't have any obligations. Your grass will feel better on your feet when you walk across you l;awn. Your job will take on new meaning because you can walk away any time. You have a 0% chance of getting foreclosed on. You won't pay taxes on gains of the other instrument. You won't be at risk of the other instrument being worthless.

Debt free is the best feeling in the world, and that's better than a 1 or 2% taxed arbitrage.

posted by bensherman at 6:42 AM on June 25, 2009 [1 favorite]

On the other hand, If you aren't planning on staying in your house for the next decade (and it can be hard to plan that far ahead) having the money tied up in equity instead of in something a little more liquid could be a problem too.

posted by garlic at 1:44 PM on July 15, 2009

posted by garlic at 1:44 PM on July 15, 2009

This thread is closed to new comments.

The point you pay with your rate (thought you shouldn't have to - keep shopping) will be against the amount you borrow, so pay as much as you can before you refi. Your loan to value ratio will also be less, making it a much more attractive loan to banks.

Here are some numbers:

Payments are based on principal and interest only:

at %4.875:

128,000 borrowed:

30 year payment: $677.38

15 year payment: $1003.90

103,000 borrowed:

30 yr: $545.08

15 yr: $807.82

Here's what's awesome, if you get a 15 year mortgage for $103,000 at 4.875, and pay $1400/mo on it (you'd be paying $1550 or so, including what you pay now to your escrow), you will have this many payments: 87.

Your house can be paid of in less than 8 years.

Good luck!

posted by bensherman at 6:57 PM on June 24, 2009