I’m 5 years into a 30-year fixed-rate mortgage. Everybody tells me that I should refinance if the interest rate is more than half a point lower. However, when I look at the mortgage calculators, my monthly payment will be lower if I refinance, but since I would be extending the term for 5 years more, I would end up paying a lot more in interest over the next 30 years. Is the benefit that I could lower my payments and then need to invest the rest to make up for the lost interest?
You could also continue paying the same amount after the refinancing as before (putting the difference toward your principle if that’s allowed). The downside, of course, is paying closing costs again.
(void)
I’m 5 years into a 30-year fixed-rate mortgage. Everybody tells me that I should refinance if the interest rate is more than half a point lower. However, when I look at the mortgage calculators, my monthly payment will be* lower if I refinance, but since I would be extending the term for 5 years more, I would end up paying a lot more in interest over the next 30 years. ***
That shouldn’t be - if your mortgage is a 1/2 point lower. It should be less over the life in Interest paid and lower payments:
$300,000 30 year Mortgage
@ 7.5 % $455,155.18 Interest paid over the life of the loan
@ 8% $492,469.98 " " " "
@8.5% $530,427.15 " " " "
Unless I am missing something about these first 5 years on your current loan, the money you save on this loan should be far beyond the break even point.
Is the benefit that I could lower my payments and then need to invest the rest to make up for the lost interest?
Lower your payments and pay less interest over the life of the Loan.
You may be able to refinance to a 15 year mortgage and still keep your monthly payments steady.
But wouldn’t the proper comparison take into account that, as of today, they only have 25 years left to pay the +1/2% interest? vs 30 years at the lower rate? I’m not up on putting the numbers together myself…
Ah, I found a website to calculate some numbers here :
Assuming $300,000 @ 7% for 30 years, 5 years already paid off - Balance $282,394, remaining interest $316,377.
Refinance $282,394 @ 6.5 for 30 years - Total interest to pay off $360,177.
So, looking at these numbers, if I didn’t mess anything up, it would cost you about $44,000 more to refinance!
Even though the total interest on 7% is higher than 6.5%, you have already paid a big chunk of it in the first 5 years of the loan you have. If the interest rate drops more than, say 1%, you might get closer to break-even. But 1/2% looks like it doesn’t do it at this point.
If anyone can show me where I messed up, please do.
You aren’t listening to USCDiver or Telemark. :smack: (to you)
If you are five years in, then don’t think of paying for 30 more years. Think of paying for (at max) 25 years. As Telemark said, you may be able to get a 15 year fixed at the same (or almost the same) payment. You would be surprised (the good kind, a 15 year payment plan you think would be double, right? Nowhere near)
You will have to come up with new closing costs up front. You have to figure that in to whether or not it will save money. You need to get the costs upfront and get quotes from several lenders because they are lying scum. Don’t be a dickhead, but don’t be afraid of coming off rude on the phone or in person. It’s your house, your life, your security. Get it in writing and firm before you move on a refinance.
Good luck…
And don’t you typically get better rates on a 15- or 20-year mortgage than a 30-year one? I was offered a 15-year mortgage the other day at 5.125 – and if I paid two points, it would be 4.6. That seemed pretty compelling to me.
The mortgage professor website has lots of calculators and explanations:
I personally don’t pay points on loans because I think they are a bad idea. Typically you have to stay in the loan for about 7 or so years to break even paying points. I personally think that it is very likely that I might move or refinance when rates go down again before the 7 years are up.
This site has a great calculator that takes into account your tax rate and savings rate to determine your break even point if you refinance.
Making the following assumptions:
An original 30 year loan for $300,000
Original interest rate of 7%
60 months have already been paid, leaving 300 months left to pay
Refinancing for 25 years at 6.5%, with $2,000 in closing costs
A 30% tax rate
5% average return on savings (to be very conservative)
Plan on staying in the house for the duration of the new loan term
To refinance under these terms the break even point would only be 2.3 years. Monthly payments go down by a little more than $75/month. By the end of the remaining 25 year term, you will have saved almost $25,000 in interest payments to the bank, allowing you to invest or spend that money as you see fit.
While it won’t save you a fortune, it seems to make sense to consider refinancing if you need a little more wiggle room in your monthly spending/savings.
If memory serves me right ,mortgages are fixed so in the beginning you pay almost all interest. 5 yrs on a 20 yr mortgage does not retire 20 % of the loan. Not close.
Thank you for your kind words…?
I was simply pointing out the results if one was to refinance with a traditional 30 year loan at a 1/2% reduction. Surely, it is wise advice to consider donig something other than re-setting the 30 year clock. However, the 30 year re-set refi is a common product in the marketplace. The OP should be aware of all of the options all of the posters are laying out.
This is true. If you take out a 30-year loan for $300,000, you’ve repaid a little over $18,000 worth of the principal after 5 years (and meanwhile paid almost $100,000 in interest).
If you’re 5 years into a 30-year and interest rates have dropped you should look into refinancing into a 20-year. If the payment is the same or even a bit more it can save you a boatload in interest.
psychobunny, you don’t mention how long you plan to be in this house. The answer to that is going to make a difference as to what plan makes the most sense for you.
Exactly, because your early loan payments mostly go to interest. If you refinance and then sell the house a couple years later, you will have more principal to pay off, plus the refinancing costs.
I should :smack: :smack: myself, because I didn’t follow the thread and I thought you were the OP. I thought you read all of these threads and then still looked up 30 year rates. My apologies…
How would you “fix” a loan so that in the beginning you don’t pay almost all interest other than not charging interest? :dubious: This is true of any loan with a fixed interest rate that accrues at a fixed pace.