We currently have an outstanding balance of 270,000 and 8 years left on a 15 year mortgage at 5%. Rates have now gone down and it seems likely that we would get around 4.25%. Rather than reduce payments, we would be interested in paying things off sooner. If we refinance to a new 15 year mortgage and continue our current payments it seems that it will all be paid off about 2 years early, saving us 2 years of payments. Are my calculations correct? Are there any factors that come in to play that I have not thought of?
Closing costs.
Prepayment penalties, although it’s easy to find loans without them.
Concur.
I just finished a refi with no closing costs. Too bad I didn’t wait 4 weeks.
Are you using a mortgage calculator?
It’s not that there weren’t any closing costs; it just means any closing costs were rolled into the loan amount.
No, it was no closing costs. The bank ate it.
Well then, we’re going to need details. Unless this was one of the government sponsored “hardship refis” I haven’ seen any deals lately where there were no closing costs.
You currently have 8 years of payments left on your current mortgage, correct? If you refi into a new 15 year mortgage, you’re taking on 15 years of payments. When you say you’ll pay more than minimums to pay off the new mortgage 2 years earlier, do you mean to subtract that from 8 years or 15 years? In other words, are you anticipating that the refi will produce 6 more years of debt or 13?
I’ve never seen a residential loan with a prepayment penalty, but I’m sure they’re out there somewhere.
Our first loan in 2000 had a 1 or 2% penalty if paid off in the first three years. We were young and stupid and didn’t really think about the ramifications. This was back when rates were a good bit higher.
We’ve gotten a new mortgage and refi’d a few times since then, and I never saw any loans with penalties after that first. I’d guess they are more common when rates are high. But I’m still paranoid and always check.
If he refis his existing debt into a 15 year mortgage at this point, his payments will be cut in half. Instead, he is going to continue making the same payment he does now, but at the lower interest rate, it should result in his loan being paid off in 6 years, not 8, because more of each paymnt will go toward interest. That’s the theory, anyhow, I have not checked out the math.
How do you estimate closing costs?
I’m not seeing it that way. Based on the info that you gave it appears that your mortgaage amount was approximately $433,000 and your current payments are $3,424.
If you are about to make your 84th payment, you should have a remaining principal of $270,484. Your next payment will see $1,137 go towards interest and $2,287 go towards principal.
If you refinance the $270,484 at 4.25% and make payments of $3424 per month, then after 72 months, you will have $68,643. The loan would not be repaid until month 93, meaning that you would only save 3 months of payments. This would almost certainly not be worth it.
If you wanted to to pay off a $270,484, 15 year, 4.25% loan within 72 months, your monthly payments would need to be about $4263.
So, I’m not sure what’s going on - but your numbers don’t seem to work.
That aside - once you figure out what your position is, you can simply take the estimate of what the closing costs would be and do a scenario analysis where you apply them to the principal and rebuild the ammortization table to see how many payments that that would shave off of your existing loan - if it custs more payments than refinancing, then pay the principal down rather than refi.
Get a quote from the bank where you would refi.
Er … how do you estimate closing costs in general?
They really do vary wildly.
It depends on whether you need mortgage insurance premiums, how many months of property tax you need ecrowed, what the appraisal fees are, if you’re buying points (or being ‘forced too’), whether you need to buy home owners insurance, what the title service and attorney’s fees are, and on and on.
It really is a royal pain. It would be easier to just call a mortgage broker or real estate agent and ask.
ETA: oh, and of course, the origination fee 
ETA: if you really need a ballpark, then I’d say between $500 and $30,000 on most closings.
I haven’t done the math either, but, because interest is paid up front during the loan (generally-ish), refi now means taking on an entirely new chunk of interest for the same remaining balance, that’s more interest overall than without the refi, which means the lower interest rate needs to not only offset that but save beyond it. Without doing the math, seems like the rate would need to be a lot lower to make it a net gain.
This is not true when it comes to payments above the required monthly payment amount. For example even though 90% or more of your first payment will go twoards interest, any additional payments made that month will go 100% to principal.
The whole thing is actually simpler than people make it out to be.
Each month you have to pay the interest on your principal. Everything else goes towards principal. It’s just that the principal is higher in the early months than it is in later in the loan, for the obvious reason that you haven’t started paying the principal down yet. Therefore, most of your payment goes towards interest. You have to pay a minimum amount towards principal every month as part of your payment schedule. This amount increases each month because your overall minimum payment stays the same while your interest payment decreases. But at any point in time, you are free to pay additional princiapl (unless you have prepayment penalties, which are uncommon in mortgages).
So, in reality, earlier payments have more value than late as they actually increase the ratio of future payments towards principal (since the interest amount will be lower due to lower principal). This, of course, is as it should be since you are absorbing an opportunity cost in lost interest received by paying your principal rather than investing your money someplace else. This is a nominal gain, whether it is NPV positive depends on your other potnetial investments.