Yesterday, Judy posted this question in the comments section. I emailed her back, got some more info, and got her permission to share this as a post:
I wanted to ask a question of you and your readers. I’m trying to figure out if we should refinance our mortgage. Current principal balance is $183,871 at 5.25%. Our P&I is $1,148.56 plus I add $184.04 extra to prinicipal ($1332.62). Churchill has 15 years at 3.375% but would have to pay $2500 – $2800 in closing costs that would be added to our principal.
I rounded up to $186,781 and P&I would be $1323.83. I’m trying to add this into the Excel spreadsheet I have but I can’t seem to figure out what, if any, the savings would be. Is it worth paying the closing costs to do this?? I know you just went through this with your new house and thought maybe you could help me make sense of this. Thank you! — Judy
Additional info I obtained via email:
- She owns way more than 20% of the house and is not paying PMI
- She considers this their “forever house” and doesn’t intend to move anytime soon
- She made her first payment in Feb. 2010. The beginning mortgage balance was $208,000
- They’ve made 26 payments in the 30-year term
I pointed Judy to this refinance calculator to see how much money she’d save and how quickly she’d recoup her costs. Since she’s making an over payment already (current payment is $184.04 extra per month), that calculator may not be the easiest to figure out, actually. Moving on.
I then went ahead and used a different calculator, and calculated how much she’d pay in interest over the life of the loan, assuming she did not refinance and continued paying an extra $184.04/month. Her extra payment alone saves her $62,916 over the life of the loan, and she’ll pay it off in 22 years instead of 30.
Related: Even small amounts have a big impact when prepaying the mortgage here at my blog
In that scenario, she’d pay roughly $142k in interest over those 22 years.
Now, let’s plug in numbers assuming she’s refinancing. She’s considering a 15-year loan at 3.375%.
Her new payment becomes $1,323.83/month — it goes up by $175 of what she needs to pay. BUT, she’s already paying extra. So actually, this new payment is $8.79 less per month than what she’s doing now.
In the 15 years, she’ll pay $51,508 in interest. That figure doesn’t include interest she’s already paid in the last two years, however.
That’s more than $90,000 savings in interest, if she continues as-is with the same over payments!
In addition, if she pays off her loan in year 2027 instead of 2032 as she would in the current scenario, she frees up $1,323/month for five years. That’s $15,876/year and $79k for the five-years that she’d pay the loan off early.
Combine the interest savings with the better cash flow at the end of the mortgage term, and Judy will be about $170,000 ahead of the game by refinancing. Oh.My.Word.
The math suggests that it would be a fantastic idea to refinance, even if she does roll the closing costs into the new loan instead of paying for them out of pocket.
Reasons she should refinance:
- She’d keep her monthly payment roughly the same as what she’s paying now, given her overpayment
- She’ll pay her loan off 5 years sooner
- She’ll save $90k in interest off of what she’s doing now
- She’ll improve her cash flow in years 2027-2032 by $80k
- She intends to stay in the house for a long time
Reasons she might not want to refinance:
- She does have the option now to stop paying an extra $184.04/month. That’s an extra $2,208/year she could have available, if she needed to
- Judy lives in Pennsylvania, where there are some crazy things happening with property assessments. I don’t know what the situation will be for her house. I know property taxes in parts of PA are nuts. If Judy wants a little insurance in case her taxes increase, not refinancing right now might improve her cash flow to make it work.
In the end, it’s something Judy and her husband will have to decide. They’ll probably have some time yet, since there aren’t any indications interest rates will jump any time soon (though really, who knows? I don’t). It’s worth shopping it around to a few lenders to compare closing costs and interest rates. My parents recently refinanced and paid something like $500 in closing costs. I’ll have to check with them, but it was definitely lower than $1k.
I’m in a 30-year at 4.5% and we will not refinance unless rates are in the 2%s. With our Mortgage Credit Certificate giving us a big chunk of our mortgage interest back as a tax credit, it’s decreasing our effective interest rate substantially. If we refi, we’d lose that tax credit, so yeah it would have to be in the 2% range for me to consider it.
Edit: I forgot to mention one important thing — just because the rates for 15-year loans are really low, doesn’t mean she should only consider refinancing if she can do a 15-year loan. She should look at the payments and interest for a 20-year loan, or even a 30-year. I wonder if a 20-year refinance would be a happy medium for her — a lower rate and payment than what she’s paying now, and still saving a lot in interest. Even if she goes for another 30, she’ll still save a lot of interest by refinancing and her payments will be lower.
What say ye? Should she refinance? Have you refinanced recently, or are you considering it?