The costs of refinancing

Financial Planning - Financial planning in general. (Moderated) 

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Subject Author Date The costs of refinancing jIM 01-24-2008  Re: The costs of refinancing joetaxpayer 01-24-2008  Re: The costs of refinancing eagent 01-24-2008  Re: The costs of refinancing Augustine 01-24-2008
Posted by jIM on January 24, 2008, 12:41 pm With the drop in rates on Tuesday, I took a peak at mortgage rates and started thinking of the various ways to measure whether refinancing made sense. I could not come up with a good measure (financially) in some cases. The question: Is there a way to quantify the "additional time" added to the repayment term when refinancing? Bought house Dec of 05 refinanced June of 06 (added 8 months to repayment terms, lowered rate by .5%) Currently a P&I payment of $1689.44. original LTV of 80%, $289,900 financed at 5.75% 30 year fixed. How do you measure the fact that a loan of the same rate (30 year fixed) would lower the payment today, simply because I have paid down about $3400 of principal? If I were to refinance 30 year fixed at 4.5% or 4% the extra 3 years I add on to my loan repayment schedule is more than enough to compensate me because I save more than $300 each month on the mortgage. I could easily send $12000 extra over the next 40 months to pay the principal down and get the extra 3 years back. If I invested the $300 I would come out even further ahead. If I were to refinance 30 year fixed at 5%, I save more than $130 per month on the P&I, but the added 3 years of payments (from the original 2035 payoff year). This does not appear worth the money: ($130*27*12=) $42000 over 27 years of payments I would save. Is there a way to quantify the "additional time" added to the repayment term when refinancing? Posted by joetaxpayer on January 24, 2008, 1:00 pm jIM wrote: > The question: Is there a way to quantify the "additional time" added > to the repayment term when refinancing? Here's how I look at it. Take the new mortgage outstanding, along with the new rate, but in the calculation, use the exact time left on your current mortgage. There are other ways I can certainly write a spreadsheet for, the time value today of those extra payments 25 years hence, but my suggestion above is 'neat' and accurate. Especially if you wish to have the mortgage paid off in the same time. I won't suggest looking for a 15 or 20 year loan, as you seem comfortable that you'll be able to invest long term and get a greater return than the rate of the mortgage. You get 4.5%, you'll be golden. Good luck to you. JOE Posted by eagent on January 24, 2008, 5:21 pm > With the drop in rates on Tuesday, I took a peak at mortgage rates and > started thinking of the various ways to measure whether refinancing > made sense.  I could not come up with a good measure (financially) in > some cases. > > The question: Is there a way to quantify the "additional time" added > to the repayment term when refinancing? > > Bought house Dec of 05 > refinanced June of 06 (added 8 months to repayment terms, lowered rate > by .5%) > > Currently a P&I payment of $1689.44. > original LTV of 80%, $289,900 financed at 5.75% 30 year fixed. > > How do you measure the fact that a loan of the same rate (30 year > fixed) would lower the payment today, simply because I have paid down > about $3400 of principal? > > If I were to refinance 30 year fixed at 4.5% or 4%  the extra 3 years > I add on to my loan repayment schedule is more than enough to > compensate me because I save more than $300 each month on the > mortgage.  I could easily send $12000 extra over the next 40 months to > pay the principal down and get the extra 3 years back.  If I invested > the $300 I would come out even further ahead. > > If I were to refinance 30 year fixed at 5%, I save more than $130 per > month on the P&I, but the added 3 years of payments (from the original > 2035 payoff year).  This does not appear worth the money: ($130*27*12=) > $42000 over 27 years of payments I would save. > > Is there a way to quantify the "additional time" added to the > repayment term when refinancing? Multiple the delta (difference) between the two payments for the number of payments on the new loan. Multiple the AMOUNT of the original payments by the delta (difference) in the term. Either add or subtract these two numbers, depending on whether your increasing or decreasing the term, to get the net difference to you. Gene E. Utterback, EA, RFC, ABA ======================================= MODERATOR'S COMMENT: Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted. Posted by Augustine on January 24, 2008, 5:22 pm FWIW, when I refinanced a few years ago, instead of going for 30- years, I asked to keep the payment the same. In my case, I thus avoided extending by 5 years the time to pay off my house since I've owned it (there were still 25 years left) by shortening it to to just 20 years. 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