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Author: rhit87 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127777  
Subject: Refinance help needed Date: 11/23/2012 10:28 AM
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I have thoroughly confused myself on evaluating a refinance.

I am currently 15 months in to a 10 year, 3.75% fixed mortgage. My balance is approximately $95,625; payment is $1071. Last payment is scheduled to be August 2021.

I am considering refinancing to a 10 year fixed at 3.25% which will give me a new payment of $934. Total closing costs will be $299. If I do this, I will pay an additional $150/month in principal to keep my payment about the same. If I am doing my calculations correctly, this will pay off my loan in June 2021.

So, am I correct in thinking that this saves me $2142-$299=$1843 or am I missing something?

Thanks.
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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124441 of 127777
Subject: Re: Refinance help needed Date: 11/23/2012 12:57 PM
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Hi rhit,

So, am I correct in thinking that this saves me $2142-$299=$1843 or am I missing something?
If all you are considering & measuring is what you have detailed here, yes you are missing quite a bit.

You appear to be entirely focused on the money you'll "save" by rushing the end of your interest payments, and appear to be ignoring the money you'll lose by channeling money away from your compounding growth opportunities, as well as the cost risks of reaccessing your cash if you bury them into illiquid real estate equity (by accelerating the elimination of your leverage.)

When/if you fully understand the bigger picture, you're far more strongly advised to take the longest amortization terms available (30+ years) on as much of your real estate value as your reliable cashflow and reserves will safely support (85-90% if possible,) and accelerating the accumulation of a liquid, compounding, long-term-positioned growth account.

By doing so you'll actually eliminate the liability of your mortgage FASTER than how you are going about it now, as you'll reach the point where you *COULD* simply stroke a check to pay off the entire amount (even if you increased it to 85-90% of your home value) sooner than you will by sending smaller checks each month.

Dave Donhoff
Leverage Planner

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Author: ArchRival2 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124442 of 127777
Subject: Re: Refinance help needed Date: 11/23/2012 1:46 PM
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I am considering refinancing to a 10 year fixed at 3.25% which will give me a new payment of $934. Total closing costs will be $299. If I do this, I will pay an additional $150/month in principal to keep my payment about the same. If I am doing my calculations correctly, this will pay off my loan in June 2021.

Author: rhit87 | Date: 11/23/2012 10:28:33 AM | Number: 124441


I think 3.25% fixed 10 year is too high of a rate. Have you checked around for rates? I currenly have a 3.25% fixed at 30 years.

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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124443 of 127777
Subject: Re: Refinance help needed Date: 11/23/2012 3:09 PM
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Where did you get $2142?

Anyway, you're [probably] going about the calculations all wrong. You savings is only the interest part of your payment, not the total monthly payment.

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Author: rma1344 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 124444 of 127777
Subject: Re: Refinance help needed Date: 11/29/2012 6:10 PM
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It appears that your original mortgage was about $107034 based on a monthly payment of $1071 at 3.75% over 10 years. Total interest payments on your mortgage will add up to $21486 over the ten year life of the loan and it will be paid off in August, 2021 plus or minus a month.

If you refinance the current balance of $95625 at 3.25% over ten years and add $150 per month to your payment,you'll be paying $1084 per month and your total interest will be $13788 over the life of the loan and it will be paid off in April 2021.

So you're saving $21486-$13788+$299 = $7997 by refinancing. If you itemize your deductions you're losing a tax benefit (ie paying more taxes) of $7997 x your marginal tax bracket whatever it is, so your net after tax savings would be lower.

The argument about paying off your mortgage quicker is a classic one. It assumes you can invest the additional $150 at a higher rate of return than 3.25%. Better yet, if you refinance over 30 years, your monthly payment will be even lower, like $443/month at 3.75%, so you'll have an additional $1071-$443= $628 per month to invest in something hopefully more liquid and at a better return than 3.75%.

Bottom line : do you live in an area where housing values are rising faster than 3.75%/ year? Even if you do then I still would refinance over 30 years and invest the difference in a good mutual fund. That way you have more liquidity and funds for emergencies, retirement, education whatever in addition to a nice gain(increaseed equity) on your home. If you live in an area where home prices don't increase much, it makes even less sense to pay off the mortgage early! Why invest in an asset that is not growing in value, locking yourself into a higher monthly payment obligation, unless you just hate making mortgage payments forever. Also with a 30 yr mortgage you'll have a higher interest deduction and lower taxes unless tax laws change which they very well could, limiting mortgage interest deductions. But yours are pretty low.

Good luck!

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