For anyone that has gone through the joy of refinancing, or maybe anyone who knows something about finances…
Generally people refinace to lower payments due to lower interest rates. However, there is a cost to refinancing, and the time it takes to ‘recoup’ those closing costs is generally considered to be the closing costs divided by the difference in payments.
For example, Loan A has a payment of $1000 and no closing costs (the present loan) while Loan B has closing costs of $2000 and a payment of $900. The time to recoup the closing costs is generally said to be 2000/100 = 20 months. It is assumed Loan B has a lower APR.
What I don’t get is why the difference in principal paydown isn’t incorporated in recoup time. Loan B will paydown your principal faster, and therefore your equity increases faster with Loan B.
Does anyone know of a better model than just closing costs/payment difference for figuring out your best loan options? It is easy enough to write a program to incorporate the principal curtailment piece (equity buildup), but then I don’t know what to do with the investment opportunity lost with the $2000 closing costs. That again is easy enough to incorporate if you assume you can make some percentage on that money and figure that as part of the cost of refinancing, but now I’m starting to think I’m overthinking this.
My particular problem is that I’m going from a 30 year mortgage to 15 year, and my payment will INCREASE. Therefore, on first pass, I will never recoup the costs. However, it is easy enough to see that after just a couple of years I’ll have far more equity in the house on the 15 year mortgage than the 30, so it would make sense to refinance (assuming I’ll be here for that long).
Anyone have a good program for doing this, or do I need to code it myself? Anyone know of other factors they have considered in refinancing that I’ve missed?