Mortgage Question

Factual Questions
1

I’m looking for facts, but there may be some opinion/experience involved so if this better suited for IMHO, mods feel free to move it.

I am many things, but I am not a finance guy. I do okay with the basics, but it gets fuzzy when I start thinking long-term. So here’s the situation.

My mortgage company has been calling me and sending me mail about lowering my rate. I’m not so dumb that I think they are just being benevolent. However, I am trying to determine if there is some possible benefit here for me.

The facts:

  • Current interest rate: 4.65% 30-year fixed
  • Offered rate: 3.99% 30-year fixed
  • My mortgage is not gigantic to begin with, and this would result in $100 savings per month.
  • I have been in this house for just shy of 3 years so I have made 34 payments
  • I would, of course, be starting over at 360 payments
  • No closing costs to refi
  • I am 49, and have no desire to move again, but not sure if i will last 30 years (me, not the house)
  • I have no other debt to speak of, but I have 3 pre-college age kids
  • Is there any real benefit to taking that $100/month and applying it to the principal?

Does it seem worth it to start over again at 360 payments to save $100/month?

2

You don’t have to start over at 30 years if you don’t want to. The mortgage broker can also arrange a 27 year mortgage, leaving you right where you are now.

You might be able to get a better rate than is being offered by your current mortgage company. I just checked www.bankrate.com and lenders in my area are offering 30-year fixed rate mortgages with no points at 3.375%. Even if you had to pay a small amount in closing costs to get this lower rate, the monthly savings might make it worthwhile.

3

Your monthly mortgage payment is your minimum payment. You should not be penalized for extra early payments (if you are, that is a BAD mortgage). So if you get a new 30 year mortgage, you could just pay what you are paying now, and finish up your mortgage early (you have 27 years left, if you refinanced but continued to pay your old payments, your house would be paid off earlier than 27 years, probably 24 or 25, i’m not doing the math but if you needed to see it I would).

You could even look into refinancing at at 15-year fixed. The interest rate should be even lower so the payment might not be so terrible. It is likely more than what you are paying now, but you will overall pay much less over the life of the loans.

4

Based on your quoted rates and the amount you say you will save, I estimate that you have a mortgage balance of right about $155,000. If you got your rate down to 3.375% on a 27 year mortgage, your mortgage payments would be about $727 per month. That is about $12 per month less than you would pay for a 30-year mortgage at 3.99% (about $739 per month) and about $111 per month less than your current payment ($838 per month).

These payments are principal and interest only – the check you write each month will still likely be bigger to include the property tax payments and escrows, but these should be the same regardless of which mortgage you have.

5

Since SacherTorte recommended it, I re-ran the numbers for a $155,000 15-year mortgage at the best available rate in my area of 2.75%. This would give you a monthly principal and interest payment of $1,052. Oddly, 15-year mortgages on bankrate.com come with higher upfront fees so it might take a little extra time to justify refinancing.

6

My advice would be, DO NOT accept any cold mortgage offer like this without shopping around. Even if refinancing is the right thing for you, there’s no reason to believe that the company that is hounding you has the best deal you can get. Go on yelp and find a mortgage broker in your area with good references and talk to them. They may be able to find you a better deal.

–Mark

7

Man, this is some great information! Thank you both. And only 23 minutes after my OP… :slight_smile:

The ~$155k figure is accurate.

I should say that, in general, my goal is to lower my monthly payment. I’m on a fairly tight budget so everything helps. As much as I would like to get into a 15-year, I’m not in the position to take on the higher payment.

8

The advice offered to arrange the shortest term you can afford and the highest payments you can afford is good advice, along with lump sum paydowns if the mortgage allows.

The key thing about mortgages is that in the early years almost all of your payments go to interest, and in later years more starts to accrue towards principal, so in general starting a mortgage over again is a bad idea – but then, they’re offering a substantially lower interest rate, so you’d have to run the numbers.

I just noticed that others have run some numbers for you, but since I already ran some quick numbers out of curiosity in the meantime, I may as well post them. I’m not a finance guy and furthermore I used a Canadian mortgage calculator, and these are just rough approximations I did out of curiosity but it gives you some sense of how it works out:

All of the below uses a baseline of $100,000.

After 3 years you’ve still got more than $95,000 left on the mortgage but have paid $13,490 in interest. This is all thrown away if you start over.

The total mortgage cost in the current setup is $84,672 of which you’ve paid $13,490, so you have a net $71,182 still to pay.

If you started over again with a new 30-year at the lower interest rate, and with a starting balance of now $95,000, the total mortgage cost would be $67,434.

According to these approximations, you’d save $3,748 over the total life of the mortgage for every $100,000 of your mortgage if you switched – so with these very rough and general assumptions you’d save money, but not very much – it’s almost a wash.

You’d save a lot more by shopping around as suggested and opting for the shortest possible amortization term.

9

To answer the question you actually asked, if you refinanced at 3.99% with no closing costs and you used the $100 per month to pay extra principal off each month, you would actually finish paying the $155,000 mortgage off in 23 years and 11 months so even this option would benefit you. You would have to make sure that the mortgage you get carries no pre-payment penalty. Few fixed-rate mortgages do these days.

And as a bonus answer since I rarely get to play with this spreadsheet and because you seem so grateful –
If you refinanced at 3.99% for 30 years and paid an extra $41 per month each month (so $780 per month), you would still pay off the mortgage in the exact same amount of time as your current mortgage (27 years and 2 months) and you would have an extra $75 in your pocket each month. Again, make sure the mortgage you get has no prepayment penalty to use this strategy.

10

That seems like a no-lose situation. Thanks again!

11

For what it’s worth, I have no skin in the game but this isn’t necessarily my advice. My general rules are:

  1. Don’t pay points to buy down the interest rate. It’s rarely worth it these days.
  2. Watch the closing costs, and make sure you understand what costs you are paying and which costs can be negotiated or eliminated. Also make sure that you find low cost quality providers for costs (like title insurance) that will be part of the closing costs. Don’t pay more here than you have to.
  3. Make sure there is no pre-payment penalty.
  4. Aim for the lowest lowest interest rate you can obtain on a mortgage you can comfortably manage. This might be a 30-year or 27-year mortgage. If you have a little extra money, you can choose to pay it off a little early, even in dribs and drabs, and shave years off the mortgage. It’s good to be disciplined if you are going to use this strategy. But, if you do this and you have tough times like unexpected bills or reduced income for a little while, you still have the choice to go back to making your minimum payment. You don’t have to ask the bank for permission and you aren’t forced to try to refinance to get lower payments at a time when your credit rating or income might make that impossible.
12

Shop around too … your mortgage company isn’t trying to save you money … they’re trying to keep you as a client … perhaps they know you can get a better deal elsewhere …

13

It will benefit you, but again, there may be even better mortgages for you if you shop around. Check www.bankrate.com. As markn+ noted, there is no reason to believe the people who called you or sent you a postcard are really offering the best deal.

14

Sorry, I’m used to the Canadian mortgage market. Here you have a, let’s say, 30-year term but it expires in 3 to 5 years depending on what you signed for. They you have to renew your mortgage, at whatever the rate is that time (timing is everything). Banks will do this all the time - let’s say your mortgage is 2 years along on the 5 years; sign now for 5 years and they lock you in for the extra 2 years. When they thought that rates would go up in 2 years, the banks were offering really good deals that expired in 2 or 3 years, get good interest now but renew when the rate is higher instead of having your current pretty good rate for 5 or more years.

How does this compare in the USA? Are you really locked in to current ate for 30 years if you want? (I think the longest renewal I can get in Canada is or sued to be 10 years). My current variable rate mortgage, IIRC, is about 2.06%.

15

Among the biggest differences between Canadian and US mortgages is that 30-year term, as you suggest. I don’t think I’ve even seen a 10-year term in Canada, the common ones are three years and five. Amortizations are over 15, 20, or 25 years typically. There is also no such thing as “points”, and closing costs are typically lower. The mortgage approval process is also typically much shorter, usually just a few days.

The biggest downside of the system is if there’s a huge spike in interest rates just around the time your mortgage term expires, but this is less of a problem in these days of stable and low interest rates. I have an old book of mortgage tables that listed rates as high as 25%! :eek: And the lowest rate it had – on the basis that no one could imagine mortgage rates ever being any lower – was 6%!

This was reasonable as rates actually hit something like 22.5% at one point in the early 80s. If those were the rates today, and you bought a house for $500,000 with a 10% down payment (that’s much less than half the average cost of a detached house in Toronto today), with a 25-year amortization you’d be paying over $8100 a month for it.

16

Your own mortgage company may offer to refinance your loan at a lower rate. While this may seem like a stupid thing for them to do, it is typically done when your mortgage is above the typical mortgage rate and they think that there’s a high likelihood that you’ll shop around for a better rate on your own. By offering you a better rate with no closing costs, they get to keep you as a customer.

Also, just be aware that with some mortgages that if you make an extra payment, you have to specify that it is applied to the principle, otherwise it just gets applied to interest and doesn’t help you much. There may be a check box on the form you send with your check (if you send paper checks) or in the online form (if you pay online) that you have to check.

If your mortgage is X per month, the mortgage company doesn’t care if you’ve made extra payments in the past. You still owe X per month. Even if you paid twice that much last month, you still owe X for this month.

17

We could get into a long discussion about the separation of the mortgage origination, financing, and servicing functions and the motivations for “his” mortgage company to offer him a better deal but it doesn’t really matter to the OP. He just wants to know whether he is being offered a better deal than he has now (seemingly yes) and whether that’s the best deal he could get (seemingly no).

You are right that he should be aware of whether his mortgage requires him to specify whether overpayments should be applied to principal or interest or escrow. None of my mortgages have required this. They have all applied overpayments automatically to principal.

18

I would just add that everything is negotiable. If the OP finds a better deal elsewhere, he should go back to his present provider and see if they can match it. I would also add that he is being too passive. Looking at his mortgage should be an annual chore to see if there are any better deals out there - don’t wait for them to come to you.

19

Huh? You don’t have an accumulated balance of interest, it is calculated monthly from the principal. Do you mean companies will take your excess money and “hold it in trust” until there is interest to charge against it, rather than reducing your pricipal? If so, the American banking system never ceases to amaze me.

20

I didn’t get that either. In the UK, any overpayment is automatically deducted from the amount owing at that date (or maybe at the month end). This means that overpayments in the early years have a disproportionate beneficial effect on the total amount of interest.

A quick check tells me that the best deal I could get currently for a 25 year mortgage is fixed until 30/09/2026 @ 2.49%, then 4.49%