Refinance or pay extra money towards principal - which is better in saving interest

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FB01
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Refinance or pay extra money towards principal - which is better in saving interest

Post by FB01 »

Hi,

Suppose I buy 1,000,000 house got 3.50% for 30 years. I paid down payment of 20% so I got loan for 800,000 so my monthly payment comes to approx $3600.

Now, I have $50,000 money which I would like pay. Which will help me in saving better in interest

Option 1 : Refinance with my mortgage company (no change in the interest rate) and will company does free of cost the refinance. If I pay $50,000 and refinance my monthly installment will come down

Option 2 : I send the mortgage company a check on $50,000 and ask them it is for principal. My monthly payment remains the same as $3600

Now I am not sure which of the above option will help in decreasing my saving in the Interest amount. I would appreciate if anyone can help me understand.

Thanks,
JR
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origin8502
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Re: Refinance or pay extra money towards principal - which is better in saving interest

Post by origin8502 »

Option 1 sounds more like a Recast than a Refinance. A Recast will not save you any interest and may very well cost you additional interest instead if you don't continue monthly payments in the amount you were prior to that Recast.

Option 2 will save you interest as would applying any amount of additional interest payment to your monthly installment.

There are many calculators available online or as downloadable Excel files that will give you specific numbers for different scenarios. I like the debt reduction calculator from Vertex which is an Excel file.
sport
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Re: Refinance or pay extra money towards principal - which is better in saving interest

Post by sport »

Option #2 will save the most interest because you will pay off the loan sooner.
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tludwig23
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Re: Refinance or pay extra money towards principal - which is better in saving interest

Post by tludwig23 »

Obviously #2. Paid off sooner = lower financing (interest) costs.
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jfave33
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Re: Refinance or pay extra money towards principal - which is better in saving interest

Post by jfave33 »

The whole point of a refinance in this situation is to lower the interest rate. If you cannot do that then option 2 is preferable. Similar outcome with no hassle. Also unless you want to do this right after you bought the house, a refinance would reset the term and so you would end up paying less each month as you are now paying over a new longer term (eg you are 2 years into your 30 year and you refinance back to a 30 year mortgage you will end up with lower monthly payments but will pay them for 2 years longer).

What you really would want to do is find a lower interest refinance that charges no closing costs. Or one that has closing costs for an even lower rate if you are prepared to live in the house for a certain minimum period of time.
Topic Author
FB01
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Re: Refinance or pay extra money towards principal - which is better in saving interest

Post by FB01 »

origin8502 wrote:Option 1 sounds more like a Recast than a Refinance. A Recast will not save you any interest and may very well cost you additional interest instead if you don't continue monthly payments in the amount you were prior to that Recast.

Option 2 will save you interest as would applying any amount of additional interest payment to your monthly installment.

There are many calculators available online or as downloadable Excel files that will give you specific numbers for different scenarios. I like the debt reduction calculator from Vertex which is an Excel file.

Thanks Origin8502.

I checked debt reduction calculator from Vertex. However, it shows me option only when I try to pay more monthly than my required mortgage. I am planning to do a one time payment of say 30,000. If I do that, how much interest I will be saving..that is what I would like to check.

Any idea..where it give me option of One Time Payment instead of Monthly Payment?

-JR
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mikep
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Re: Refinance or pay extra money towards principal - which is better in saving interest

Post by mikep »

Why not do both? Refinance and pay extra principal. These options are not mutually exclusive.
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grabiner
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Re: Refinance or pay extra money towards principal - which is better in saving interest

Post by grabiner »

The way to refinance and benefit from extra payments is to refinance to a shorter term. If you have enough extra money to make the higher payments, you can refinance your 30-year loan to a 15-year loan, lowering the rate; this comes out ahead of keeping the 30-year loan and making extra payments to pay it off in 15 years.
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niceguy7376
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Re: Refinance or pay extra money towards principal - which is better in saving interest

Post by niceguy7376 »

Use this calculator for one time payment amortization schedule
http://www.mtgprofessor.com/calculators ... tor2a.html
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