Should I do a 25 year refinance?

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Topic Author
expat
Posts: 787
Joined: Mon Mar 10, 2008 9:07 pm

Should I do a 25 year refinance?

Post by expat »

My mortgage lender has offered to do a no cost refinance of my principal residence : 378K over 25 years at 4.125%

I am currently 5 years into a 30 year loan at 5%.

I just realized the refinance does not significantly lower my monthly payment at all - see schedule below - I just pay more principal and less interest.

30 year (latest payment in amortization schedule)
Payment Principal Interest Paid
2029= 454 +1575

25 Year (first payment in amortization schedule)
Payment Principal Interest Paid
2021= 722 +1299

My question is : is there any benefit in doing this refinance?

I can't see any especially since my mortgage interest if fully tax deductible.

Does the bank have some incentive to offer this?
icefr
Posts: 613
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Re: Should I do a 25 year refinance?

Post by icefr »

This seems like a no brainer to me. Your mortgage would be paid off at the same time it is currently and you will pay less interest. I would keep paying your current payment of $2,029 as well, which would send $8 extra to principal each month.
I can't see any especially since my mortgage interest if fully tax deductible.
You're still paying the mortgage interest even though it is tax deductible. Why should you pay any more interest than you need to?
ShowMeTheER
Posts: 511
Joined: Mon May 24, 2010 9:12 am

Re: Should I do a 25 year refinance?

Post by ShowMeTheER »

This would be a no-brainer. Your net worth increases each month versus your prior situation and you are out no money.

One reason your lender is doing this is b/c your rate is too high for the current market, so they are being proactive in keeping your business.
curmudgeon
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Re: Should I do a 25 year refinance?

Post by curmudgeon »

I presume your lender is tacking in some significant loan origination fees which get added back into the loan balance. I'd shop it around to a few lenders, and maybe consider dropping down to a 20-year loan if you can get a better rate.
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Meg77
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Re: Should I do a 25 year refinance?

Post by Meg77 »

You are right that over the life of the loan you are unlikely to come out far ahead with this new option. With your current loan you'll pay $608,700 in total mortgage payments over the next 25 years. With the new loan you'll pay $606,300, based on your figures. It looks like you'll "save in interest" based on the current payment breakdown, but if you compare the amortization schedules side by side you'd see the total interest and total principal are about the same over the whole loan term remaining and the whole new loan term. How can that be if the rate is different? Because is because interest is front-loaded on mortgages, so you've already paid a substantial amount of the total interest on your current loan. Refinancing with the option you're looking at doesn't do you much good.

However, I do think you should look into refinancing if you plan to keep your home indefinitely. If you were to do a 20 year term loan at 4.00% (and you may be able to get an even lower rate), your payment would increase to $2,291. You'd only pay $549,840 over the remaining life of the loan, saving you $56,460 in interest compared to the refinance option you're looking at now.
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Hypersion
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Re: Should I do a 25 year refinance?

Post by Hypersion »

Shop around, that rate isn't that great.
randomguy
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Re: Should I do a 25 year refinance?

Post by randomguy »

icefr wrote:This seems like a no brainer to me. Your mortgage would be paid off at the same time it is currently and you will pay less interest. I would keep paying your current payment of $2,029 as well, which would send $8 extra to principal each month.
I can't see any especially since my mortgage interest if fully tax deductible.
You're still paying the mortgage interest even though it is tax deductible. Why should you pay any more interest than you need to?
Because you end up with more money in 25 years? You pay the same and get a bigger tax write off.

Frankly this math makes zero sense. They have to be really jacking up your balance some how to have a 1℅ rate drop not result in lower payments. Was 378k your original mortgage size or is it your current balance?
Topic Author
expat
Posts: 787
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Re: Should I do a 25 year refinance?

Post by expat »

randomguy wrote:
icefr wrote:This seems like a no brainer to me. Your mortgage would be paid off at the same time it is currently and you will pay less interest. I would keep paying your current payment of $2,029 as well, which would send $8 extra to principal each month.
I can't see any especially since my mortgage interest if fully tax deductible.
You're still paying the mortgage interest even though it is tax deductible. Why should you pay any more interest than you need to?
Because you end up with more money in 25 years? You pay the same and get a bigger tax write off.

Frankly this math makes zero sense. They have to be really jacking up your balance some how to have a 1℅ rate drop not result in lower payments. Was 378k your original mortgage size or is it your current balance?
My current balance is actually 375K but the proposed "amount financed" (from the federal truth in lending disclosure statement) is 378K.

The original loan amount was 410K.
Petunia
Posts: 174
Joined: Thu Apr 16, 2009 9:10 pm

Re: Should I do a 25 year refinance?

Post by Petunia »

I agree that this does not seem to make much sense. Are you exactly 5 years into your current amortization schedule?

You said the interest on your next payment is $1,575, which would mean your balance now is 378k. (378k x .05 / 12 = 1,575). Yet, you say you currently owe 375k. Something is off someplace.
Petunia
Posts: 174
Joined: Thu Apr 16, 2009 9:10 pm

Re: Should I do a 25 year refinance?

Post by Petunia »

Meg77 wrote:You are right that over the life of the loan you are unlikely to come out far ahead with this new option. With your current loan you'll pay $608,700 in total mortgage payments over the next 25 years. With the new loan you'll pay $606,300, based on your figures. It looks like you'll "save in interest" based on the current payment breakdown, but if you compare the amortization schedules side by side you'd see the total interest and total principal are about the same over the whole loan term remaining and the whole new loan term. How can that be if the rate is different? Because is because interest is front-loaded on mortgages, so you've already paid a substantial amount of the total interest on your current loan. Refinancing with the option you're looking at doesn't do you much good.

However, I do think you should look into refinancing if you plan to keep your home indefinitely. If you were to do a 20 year term loan at 4.00% (and you may be able to get an even lower rate), your payment would increase to $2,291. You'd only pay $549,840 over the remaining life of the loan, saving you $56,460 in interest compared to the refinance option you're looking at now.
No, mortgages aren't front-loaded. Front-loaded means you pay ALL of the interest owed for the entire contract up front. It is added to your balance on day one. If that were indeed the case, it would be extremely foolish to ever refinance or prepay a mortgage.
Petunia
Posts: 174
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Re: Should I do a 25 year refinance?

Post by Petunia »

The calculator at bank rate says a 410k mortgage fixed at 5% for 30 years has a principal and interest payment of $2,200.97.

I say again, something is off with your numbers.
itstoomuch
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Re: Should I do a 25 year refinance?

Post by itstoomuch »

No.
Do a variable 5/1, 7 or 10. Then accelerate the payments.
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abyan
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Re: Should I do a 25 year refinance?

Post by abyan »

This sounds exactly like my streamlined refi I'm doing with Bank of America. 4.125% for either 30 years or 20 years, zero (and I mean zero costs), and they're even throwing $300 into my escrow. I'm lowering my rate from 4.875%. I didn't want to pay points, and didn't see the point of locking myself into a 20 year payment scheme that has the same rate as the 30 year (I could always pay more each month if I want and have it go to principal). Also, the 20 year wouldnt lower my monthly payment. The 30 year does lower it by $400 per month. (And in the end, I pay almost exactly the same amount of interest as I'd have paid under my current loan.) For me, the lower monthly payment and zero cost make it worth it. If I'm going to oay them the same amount, I'd rather have it be over a longer period during which I get to hold on to my money longer, and invest it myself. Did they offer you a 30 year? At first I didn't like the idea of extending my mortgage, but talked to friends who seem to understand this better than I, and both said I should go for it. (In part because money has been tight lately so I I wouldn't mind socking away the extra $400 per month, and if money becomes really tight the lower payment will help.) As for the lower mortgage rates out there, the streamline was attractive to me, as there's no appraisal, no income or credit requirement (other than that you've paid your bills). I'd have liked to have cut back my interest payments significantly, but still appreciate the lower monthly payments.

And I did look around but couldn't find much that didn't have points and/or fees.
Topic Author
expat
Posts: 787
Joined: Mon Mar 10, 2008 9:07 pm

Re: Should I do a 25 year refinance?

Post by expat »

Petunia wrote:The calculator at bank rate says a 410k mortgage fixed at 5% for 30 years has a principal and interest payment of $2,200.97.

I say again, something is off with your numbers.
You're right. :oops:

This
2029= 454 +1575

should have read

2215= 640 +1575

454 was the escrow amount that I mistook for principal.

Thanks to all for helping on this.
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