Jul 09 2012

Looking at mortgage refinance scenarios — is it worth it?

I saw that mortgage interest rates were at a new low, so I thought I’d run some numbers to see if it might be worth refinancing. We haven’t even hit the one-year mark in our house! To recap:

  • We have a 30-year loan with 29 years and a few months remaining
  • It’s a 4.5% fixed rate
  • When we purchased the house, we qualified for a Mortgage Credit Certificate, which gives us a sweet 20% tax credit of our interest paid on our federal income taxes. In a normal year, that’s looking like a $1100-1200 tax credit, and it will decrease each year as we build more equity and pay less in interest. My lender confirmed that we’d be able to keep our MCC (!!) (I thought we’d forfeit it) with a $325 one-time fee.

There are two things we’d need to consider: our new monthly payment, and our total interest paid on the loan. If our monthly payment would decrease, that means we’d have money freed up to put toward other goals. And, it means we’d build more equity in our house more quickly.

Current payment: $668.82/month (plus taxes and insurance of course, but that would remain a constant).

I contacted our lender and he said a 15-year could be had with no closing costs for 3.49%, or we could get 3.25% with $1500-$2k in closing costs.

Scenario #1: Keep our loan as it is, and make payments on it to accelerate the payoff date to 15 years from when we closed on the house. We’d need our monthly payment to be bumped up by $360, making it $1,028/month. Over the life of the loan, we’d pay $183,124 (that’s principal and interest). Paid off in 2026.

Except, when we deduct the value of the MCC, we’d save $10,224 on our taxes, so that’s effectively $172,900 total paid. I’m not factoring in the regular mortgage interest deduction we’d also be able to get, since that’s just getting a little complicated for this evaluation.

Scenario #2: Refinance to a 15-year, no closing costs at 3.49%.

The new term would expire in 2027, so one year later than Scenario #1.

Monthly payment: $928.71, or $11,144 per year. This is $1,192 cheaper per year than the first scenario.

Total payments: $167,167, which is $5,733 cheaper than the first scenario. Our MCC value would be $7,433 total, so the total payment would effectively be $159,734. That’s $23,390 less!

Summary:

If we’re wanting to pay off our house in 15 years, then refinancing is going to save us a lot of money in interest, and it’s also going to require a smaller payment to accomplish that. If I compare refinancing vs. just paying extra, refinancing wins by far. The only advantage not refinancing is keeping that flexibility with lower payments. I don’t know what rates are for 30-year loans right now but that could also be an option to maintain that flexibility. If refinancing another 30-year would be a big rate decrease, we may just do that and pay extra.

I think we’ll want to wait until Shane gets going on his new job before we do anything, but I’m glad I ran the numbers.

Really, if you can do it with no closing costs and you could get a lower payment/save in interest, why not?

Have you refinanced in awhile? Are you planning on it soon?



7 Responses to “Looking at mortgage refinance scenarios — is it worth it?”

  1. You should help me figure out if we should refinance :)

  2. Oh- and another thing to consider is the amortization of the loan. Like at first you are paying mostly interest and very little principal, and later more principal and less interest. We have considered refinancing but we’re 5(?) years into our mortgage and are actually chipping away at the principal more now.

  3. Reading real estate numbers outside of NYC makes me want to move. Your highest extra payment is still several hundred less than we pay out in mortgage each month… le sigh, but I love this city.

  4. Yeah, that’s NYC for ya. Or San Francsisco. Or a lot of places! It’s really affordable where I live.

    Mrs. Money, I’m happy to run numbers with ya! And you’re right — if you’re several years into a loan refinancing at the same term would just push your pay-off date that much further into the future.

    Ideally, we’ll have our house paid off around the time Johnny is starting college, thereabouts.

    Maybe you could look at a 20-year just to see? Then again, if doing a 30 would be a huge monthly decrease and s avings, that might be worth it right now depending on what you’re currently paying.

  5. So, your post got me thinking. I just checked with our lender…and closing costs are close to $5,000. Ugh. :(

    We are 8 years into our loan, 30 year fixed, with 5.5% rate.

    To refinance or not to refinance. That is the question! :)

  6. I’d choose option 1, but that’s mostly because it’s what I did a year ago. ;-)

    I was looking at the same situation, but decided that the job market in this economy could not be trusted and I didn’t want to lock myself into higher payments with a 15 year even though it was less total money paid. I decided to go for flexibility (and security) of the 30 year. It gave us better cash flow with the option to make extra payments and still pay off the loan much sooner than 30 years.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

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