Should I refinance? (moderate length, w/cliff notes)

[I.Rowboat]

I was going to bump the "Ask Me Anything about Mortgages" thread but it was getting pretty long, so I might as well start a new thread. Cliff Notes at bottom.

Briefly: My wife and I have lived in our house for 8 years, have two kids, stable jobs, love our home, and have no intention of moving. Also, we live in a suburb in Northern California/SF Bay Area, which isn't a cheap place to live, so take that into account once the number start rolling.

We started out with a 30 year/fixed for $348k @ 7%, paid off $60K of principal in a lump sum ( [img]/images/graemlins/heart.gif[/img] stock options), and refinanced the balance of ~$275K about 4 years ago into a 20 year fixed @ 6%. Our current balance is around $250k. Current monthly payments are $2060, with $800 going against principal.

Since we have no intention of leaving/moving, and our credit is perfect, I'm thinking it might make sense to refinance again. The $2k/month payment is fine, so my goal would be to switch to a 15 year or shorter fixed at a lower rate and shave some time off the length of the loan. Current rates from Bankrate.com for zero point, 15 yr/fixed loans seem to be in the 5.45% - 5.55%, plus $1k in fees and closing costs.

Seems like refinancing will allow us to save a year or so of payments, and it would be great to have this paid off before the kids start college, etc. Again, our goal is to own the home outright, as we like it a lot and, frankly, even with our home's appreciation and our rising equity it would be prohibitively expensive to relocate within this area.

Refinancing seems to make sense, or am I missing something?

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Cliff Notes: Owe $250k @ 6% with 16 years remaining on a 20 year fixed mortgage. Would like to switch to a 15 year or shorter fixed mortgage @ 5.5% or less and save monies for the shorties' college years. Good idea, amirite?

[squiffy]

You should do a search for mortgage refinance calculators and plug the numbers into several of them. They each may have slightly different assumptions built into them.

Just eyeballing it, I am not sure it's worth it to pay the 1000 to lower the interest rate a half a percentage point. It's not clear how long it will take to breakeven. So you need to calculate your breakeven point and how many months it will take to get there and make the $1000 payment worth it. And there may be some hidden fees that make it more expensive than $1000.

It's kind of like saying, I am buying individual cans of coke at the market for 25cents a can. But if I pay $1000 upfront to the supermarket, they will give me a discounted price of 20 cents a can going forward. You have to buy a lot of cans of coke for a long time, to make it worth it.

And you are comparing apples and oranges. You need to compare a 30 year mortgage with a 30 year mortgage, a 20 with a 20, and a 15 with a 15.

In theory, you can just make extra payments to principal on a 30 year mortgage at any time, to "convert" it into a 20 or 15 year mortgage.

So it might be cheaper just to keep your 20 year mortgage and make larger payments, assuming there is no prepayment penalty.

What will your payments be on the 15 year?

[squiffy]

This guy does "expert" commentary on Yahoo Finance. He has a website with some interesting articles and calculators that you can review.

The website I posted above gives a calculation of 71 months or about 6 years to break even. But it doesn't explain it's assumptions.

I guess the trade off is how much money do you save every month on the lower interest rate, vs. how much do you lose by paying a $1000 fee today, that could have been invested at 5%, 10% etc. in CD's or on the stock market.

http://www.mtgprofessor.com/

[jthegreat]

[ QUOTE ]
In theory, you can just make extra payments to principal on a 30 year mortgage at any time, to "convert" it into a 20 or 15 year mortgage.

[/ QUOTE ]

Seems to me this is clearly the way to go, especially considering that if something were to come up, you aren't *locked* into making a higher payment every month. Just start paying extra every month to whatever you're comfortable with.

[Big TR]

If you plan on staying there to mortgage payoff, I figure you can save $9k by doing this. You would pay ~$135k in interest on your current loan and $117k in interest on your new loan at 5.5%, a savings of $18k.

The costs of this are estimated closing costs at $2k, and lost tax deduction of the interest expense. I'm guessing your marginal rate is 40% given California's onerous tax structure, so you are out $7k in tax savings. So at a total cost of $9k, you will net $9k out of this deal. You can probably handle the jump in monthly payment since it is only from $1971 to $2043.

Interest Calculations
15YR NEW 5.5% 20 YR old 6.0% Int Var
2008 13,474 14,314 (840)
2009 12,852 13,739 (887)
2010 12,194 13,128 (934)
2011 11,499 12,480 (981)
2012 10,765 11,791 (1,026)
2013 9,990 11,060 (1,071)
2014 9,171 10,284 (1,114)
2015 8,305 9,460 (1,155)
2016 7,391 8,586 (1,195)
2017 6,425 7,657 (1,232)
2018 5,405 6,671 (1,266)
2019 4,327 5,624 (1,297)
2020 3,188 4,513 (1,325)
2021 1,986 3,333 (1,348)
2022 715 2,081 (1,366)
2023 751 (751)
TOTAL 117,687 135,474 (17,787)

[I.Rowboat]

squiffy, jthegreat, and Big TR: Thanks for the feedback and analysis -- much appreciated.

[SossMan]

A few things:

Bankrate.com has gotten sued recently for false advertising of their rates. They are notoriuosly bait and swith. It makes sense as they are simply a clearing house for brokers to advertise and brokers aren't exactly known for their 'upfrontability' (disclaimer: I am a Broker in N.Ca)

It would be very tough to get a 15 year fixed at 5.5% today w/ only $1k in fees. The lender/title fees alone will be around 2k. Add in the other junk fees and $2500-3k is more accurate.

The rate for my best lender today is 5.75%. To get to 5.5% on a 15 year, you would have to pay 1 pt.

good luck.

[I.Rowboat]

Squiffy, thanks again for the link to mtgprofessor.com! If his calculators are accurate (and I have no reason to see why they wouldn't be), it definitely makes the most sense for us to (a) begin paying our mortgage bi-weekly, something we should have done years ago, and (b) throw in an extra $50 or so with each payment.

Switching to a bi-weekly schedule would save us $19k+, and shave about 24 months off the length of the loan; going bi-weekly + $50 extra per payment would save us $28.8k and about 36 months.

SossMan, thanks for the honest info on Nor. Cal loan rates and fees -- it's appreciated.