financial.freedom wrote:jimb_fromATL wrote:It's highly unlikely to be worth refinancing for such a small reduction in the rate. There are closing costs and expenses involved in processing a new mortgage, typically in the range of 1% to 2% or more of the balance of the loan.

Thank you for the detailed reply!

I did the math and looks as though you are correct, not worth it.

Currently owe: $1,188,000

Monthly payment: $5,472

No PMI

Roll the debt into the new mortgage.

Hmmm. I mentioned 1% to 2% closing costs that most people have been reporting on their refis, but that's typically for much smaller mortgages. It doesn't cost any more time to process a million dollar mortgage than a $100K mortgage, so the percentage appears to be lower for really big loans. (Conversely, it takes just as much time for a $50K mortgage as it does $100K, so the percentage of closing costs is often higher and more prohibitive on very small loans.)

A quick check shows my credit union charging only about $10,000 closing costs on a $1,188,000 jumbo loan. BAC shows about $20,000. So it appears to be well worthwhile shopping around.

it looks like you

*could* save some money for refinancing IF the closing costs are low enough and IF you stay in the home long enough and IF you make the same payment on the new loan as you are required to make now on the old loan. (It looks like it will take at least 5 years or so to reach the true break-even point where you would owe no more on the new mortgage than you would have on the old mortgage.)

Also, if you have plenty of room to spare in the budget, it looks like some lenders have somewhat lower rates for 15 year loans. As someone else mentioned in this thread you can get an even lower rate on a

time-bomb ARM (Adjustable Rate Mortgage). If you are positive you won't have the home before the rate adjusts, that might be worth a gamble.

Here are some numbers to ponder ... and to use as a guide in verifying them through other calculator/sources.

Code: Select all

```
_____ pay up front balance months payment total paid interest
current mortgage $0 $1,180,000 3.625% 354. $5431.97 $1,922,916 $742,916
refi roll in $10000 costs $0 $1,190,000 3.400% 360. $5277.43 $1,899,874 $709,874
make old pmt on new mtg $0 $1,190,000 3.400% 342.64 $5431.97 $1,861,226 $671,226
pay closing costs up front $10,000 $1,180,000 3.400% 360. $5233.08 $1,893,908 $713,908
old pmt on new mtg $10,000 $1,180,000 3.400% 337.82 $5431.97 $1,845,004 $665,004
pay down existing mtg $10,000 $1,170,000 3.625% 348.68 $5431.97 $1,904,017 $734,017
```

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The above table shows:

- If you owe $1,180,000 at 3.625% with 354 months remaining the payment is $5431.97 per month for P&I. The total paid will be $1,922,916 with $742,916 interest.

If you refi and roll in $10,000 closing costs then $1,190,000 at 3.4% for 360 months has a payment of $5277.43 per month for P&I. The total paid will be 360 x $5277.43 = $1,899,874 with $709,874 interest. The total is $23,043 less than the current mortgage.

If you make the old payment of $5431.97 then the balance of $1,190,000 at 3.4% will be paid off in 343 months. The total paid will be 342.64 x $5431.97 = $1,861,226 with $671,226 interest. This total is $61,690 less than the current mortgage ... and cuts 11 months of payments.

**Notice that the $155 lower payment on the new mortgage costs you $38,647 more interest and 17 months in debt. That's proof that the lower payment is not free money.** This principle will apply no matter what the rate or how much the closing costs. Time is an exponential factor in compound interest on mortgages. So If you make a lower payment for a longer time at *any* given rate, it will cost more total interest.

If you pay the closing costs of $10,000 up front and refinance the balance of $1,180,000 at 3.4% for 360 months the payment will be $5233.08 per month for P&I. The total paid will be 10000 + (360 x 5233.08) = $1,893,908 with $713,908 interest. This saves a total of $29,008 over the existing mortgage.

If you pay the closing costs of $10000 up front and refinance the balance of $1,180,000 at 3.4% and make the old $5431.97 payment it will be paid off in 337.8 months. The total paid will be 10000 + (337.82 x 5431.97) = $1,845,004 with $665,004 interest. This total is $77,912 less than the current mortgage.

If you pay the same $10000 on the existing mortgage, the balance of $1,170,000 at 3.625% with the $5431.97 payment will be paid off in 348.7 months. The total paid will be 10000 + (348.68 x 5431.97) = $1,904,017 with $734,017 interest.

* So the real apples-to-apples comparison for the same money up front and the same monthly payment shows that refinancing could save $59,013 and 11 months of payments.*
If you can find a lower rate, or if you can afford to commit to a shorter loan you can save even more. However, it's worth considering the pros and cons of committing to a 30 year mortgage and making a higher payment to pay it down faster. It will cost somewhat more interest, but gives you an option to drop back to the lower minimum payment if times were to get tough financially.

Since you expect to sell the home in a few years, it's important to realize how long it will be before the savings in interest will make up for the closing costs. The table below shows the status of the loan options after 5 years:

- Notice in that table that after 60 months you'll owe $1,057,363 on the old mortgage, but if you make only the new minimum payment on the new mortgage you'll owe $1,065,552 at the same point in time. That's $8,188 more debt after 5 years than you would owe on the old mortgage.

Making the old payment on the new mortgage will drop your new mortgage's balance to $1,055,460 in 5 years. That's $1,903 less than you'd owe on the old mortgage.

Paying the closing costs out of pocket up front then the same old payment on the new loan; for the same money out of pocket you'll have $1,770 more equity (less debt, more net worth) after 60 months on the new loan compared to paying the money up front on the old loan.

**So IMO the break-even point is really slightly less than 5 years, and then only if you make the higher payment on the new mortgage.**

Code: Select all

```
in 5. years: at month balance paid equity interest % interest in pmts
current mortgage 60. $1,057,363 $325,918 $122,637 $203,281 62.4%
refi roll in $10000 costs 60. $1,065,552 $316,646 $124,448 $192,197 60.7%
make old pmt on new mtg 60. $1,055,460 $325,918 $134,540 $191,378 58.7%
pay closing costs up front 60. $1,056,597 $313,985 $123,403 $190,582 60.7%
old pmt on new mtg 60. $1,043,610 $325,918 $136,390 $189,528 58.2%
pay down existing mtg 60. $1,045,379 $325,918 $124,621 $201,297 61.8%
```

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Let's look a the status in 10 years in the table below:

- Notice in that table that after 120 months you'll owe $910,397 on the old mortgage, but if you make only the new minimum payment on the new mortgage you'll owe $918,078 at the same point in time. That's $7,681 more debt after 10 years than you would owe on the old mortgage.

Making the old payment on the new mortgage will drop your new mortgage's balance to $896,027 in 10 years. That's $14,369 less than you'd owe on the old mortgage.

Paying the closing costs out of pocket up front then the same old payment on the new loan; for the same money out of pocket you'll have $14,051 more equity (less debt, more net worth) after 120 months on the new loan compared to paying the money up front on the old loan.

Code: Select all

```
in 10. years: at month balance paid equity interest % interest in pmts
current mortgage 120. $910,397 $651,836 $269,603 $382,233 58.6%
refi roll in $10000 costs 120. $918,078 $633,291 $271,922 $361,369 57.1%
make old pmt on new mtg 120. $896,027 $651,836 $293,973 $357,863 54.9%
pay closing costs up front 120. $910,363 $627,969 $269,637 $358,332 57.1%
old pmt on new mtg 120. $881,985 $651,836 $298,015 $353,821 54.3%
pay down existing mtg 120. $896,036 $651,836 $273,964 $377,872 58.%
```

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jimb