Should we refinance to a 10 or 15 year mortgage?

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Woodthrush
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Should we refinance to a 10 or 15 year mortgage?

Post by Woodthrush » Sat Nov 30, 2019 4:31 pm

My husband and I just received an inheritance of $127,000 and are thinking about refinancing and putting that money towards our home equity. We're retiring in 8 years and we'll probably sell our house and move elsewhere (not sure), but the plan is to own the place we retire in outright with no mortgage. We owe $262,500 on our current 30-year mortgage, which has 20 years left on it and has a 3.5% interest rate.

We're thinking of refinancing to a 10 or 15-year fixed-rate mortgage, and the loan amount would be about $135,000. Our goal in doing this would be to have more of our monthly payments over the next 8 years go toward principal and reduce the amount of interest paid over that period.

The alternative would be to put the inheritance in a CD for the next 8 years and using it towards buying our retirement home. We already have a full equity position in our retirement accounts and want to keep the inheritance money completely safe.

Are there any reasons why we might not want to do the refi? A 10-year loan would be best for paying the loan quickly, but we're not sure there's as much of a market for those as for 15-year loans. Any thoughts on whether it would be best to do a 10 year versus 15-year loan?

And, finally, can anyone recommend a good website for researching the best interest rates and lenders? We used to use Bankrate, but now they have have sponsored banks, so it's harder to find the non-sponsored rates and there don't seem to be many listed. We could find only one generic 10-year loan rate on that site, so it's pretty worthless to us for loan shopping.

Thanks!

mortfree
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by mortfree » Sat Nov 30, 2019 4:44 pm

Had a paid off house that sold for 225k.

All of my down payment was in the house so I needed a contingency to sell my house first.

It was definitely a strange feeling but it all worked out.

So you would probably be in a similar situation.

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Woodthrush
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by Woodthrush » Sat Nov 30, 2019 5:23 pm

That's one of the reasons why we considered keeping the money more liquid - so that we would have some cash to use as a downpayment in buying another place. Some friends sold their home last year in preparation for retirement and they had all their liquid funds in the house, so they only had a few weeks to find a home and ended up buying one that is less than ideal. Since we would likely be moving out of state after retirement that would be even trickier. We'd rather not have to find a short-term rental after selling, put our things in storage and then have to move again in a few months.

But in looking at the amortization calculators it looks like we might save over $30,000 in interest charges over the next 8 years by refinancing (versus our current mortgage). Of course, if we put the funds in a CD it would earn maybe 2% minus taxes so the net difference might be a savings of around $20,000 if we did the refi instead of the CD. These are back of the envelope calculations, so it may be off a bit. But we're not able to deduct the interest on our mortgage anymore so we're paying more for it.

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Brianmcg321
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by Brianmcg321 » Sat Nov 30, 2019 5:54 pm

You don't have to refinance to do what you want. Just put the inheritance on the current mortgage. Then pay your current mortgage like its a 10 or 15.

You just need to use a mortgage calculator to compute what your new payment would be. This would save you on closing costs, and your probably not going to save much on interest given you already have a pretty low rate.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

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Woodthrush
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by Woodthrush » Sat Nov 30, 2019 6:12 pm

If we put the inheritance towards the current mortgage, then we're assuming our monthly payment would stay the same since it's a fixed-rate mortgage. Would the mortgage company change the amortization schedule after we did that so that more of the monthly payments would be going to pay principal? Right now, we're paying more interest than principal every month and we'd like to pay a lot more towards principal than interest without increasing our total monthly payment. Would the mortgage company just apply the amount to the back end of the loan and continue to have us pay the same amount of interest every month?

Thanks for your feedback!

is1971
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by is1971 » Sat Nov 30, 2019 6:33 pm

Woodthrush wrote:
Sat Nov 30, 2019 6:12 pm
If we put the inheritance towards the current mortgage, then we're assuming our monthly payment would stay the same since it's a fixed-rate mortgage. Would the mortgage company change the amortization schedule after we did that so that more of the monthly payments would be going to pay principal? Right now, we're paying more interest than principal every month and we'd like to pay a lot more towards principal than interest without increasing our total monthly payment. Would the mortgage company just apply the amount to the back end of the loan and continue to have us pay the same amount of interest every month?

Thanks for your feedback!
The whole $129,000 (possibly minus one month of interest) would be applied to your outstanding principle. So, just by virtue of owing less money, more of your future payments will go towards principle and less towards interest. It's true that your required payment won't change, but that doesn't mean that you can't plug the numbers into an amortization calculator and pay it off as though it were a 10 or 15 year loan.

One thing that might make this clearer for you is to understand that assuming the interest rates were the same, there is no difference between a 15 year mortgage and a 30 year mortgage paid off as if it were on a 15 year amortization.

HomeStretch
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by HomeStretch » Sat Nov 30, 2019 6:33 pm

Agree that your rate is pretty good and that it might not make sense to refinance due to closing costs and a loan payoff goal of 10-15 years. But definitely check out 10 and 15 year rates at online lenders.

Your loan agreement may allow you to make payments against principal without penalty. Make sure it gets applied to principal and not just credited against future payments. This reduces your principal balance outstanding which in turn increases the portion of your monthly payment going towards principal. You can run an amortization table in Excel to figure out how soon your mortgage will be repaid if you put $xx of the inheritance towards principal and keep paying $yy per month.

Your loan agreement may allow you to request that your mortgage holder “recast” the loan (usually for a fee) after you make a large payment against principal. In effect the mortgage holder recalculates the lower monthly payment over the remaining term of your loan (20 years). Again you can run an Excel amortization table to calculate the additional amount you would need to pay each month towards principal in order to pay off the loan in 10 years or 15 years, etc.

lakpr
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by lakpr » Sat Nov 30, 2019 6:45 pm

+1 to just apply everything to the existing principal. I just looked at bankrate.com for 15 years and 10 years term mortgages, the rates seem to be around 3.25%. So you are not really gaining anything by refinancing (0.25% rate differential is practically nothing).

If the lender allows, then recast the mortgage payments for the remainder term. You will have achieved your goal with minimal expenses (perhaps about $200 recast fee).

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Re: Should we refinance to a 10 or 15 year mortgage?

Post by willthrill81 » Sat Nov 30, 2019 6:53 pm

A 3.5% guaranteed after-tax return is hard to beat these days.

Are you already maxing out all of your tax-advantaged space (e.g. 401k, HSA, IRAs, etc.)? If not, buying stock through those tax-advantaged accounts might be a better option. I would not recommend that you buy bonds through those accounts though since their yield will be less than you're paying on your mortgage; you generally don't want to borrow money at an after-tax 3.5% rate only to lend it out at a pre-tax 2.7% yield.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

boomer_techie
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by boomer_techie » Sat Nov 30, 2019 7:11 pm

is1971 wrote:
Sat Nov 30, 2019 6:33 pm
The whole $129,000 (possibly minus one month of interest) would be applied to your outstanding principle. So, just by virtue of owing less money, more of your future payments will go towards principle and less towards interest. It's true that your required payment won't change, but that doesn't mean that you can't plug the numbers into an amortization calculator and pay it off as though it were a 10 or 15 year loan.
Paying off nearly half of the balance of a loan with 20 years to go should convert it to a loan with less than 10 years remaining. Decreasing the monthly payment to bump the term back to 10 to 15 years won't be allowed at that point.
One thing that might make this clearer for you is to understand that assuming the interest rates were the same, there is no difference between a 15 year mortgage and a 30 year mortgage paid off as if it were on a 15 year amortization.
And also there's no difference between a 30 year mortgage with 15 years to go and a brand new 15 year mortgage with the same balance due.

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Brianmcg321
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by Brianmcg321 » Sat Nov 30, 2019 7:13 pm

Woodthrush wrote:
Sat Nov 30, 2019 6:12 pm
If e we put the inheritance towards the current mortgage, then we're assuming our monthly payment would stay the same since it's a fixed-rate mortgage. Would the mortgage company change the amortization schedule after we did that so that more of the monthly payments would be going to pay principal? Right now, we're paying more interest than principal every month and we'd like to pay a lot more towards principal than interest without increasing our total monthly payment. Would the mortgage company just apply the amount to the back end of the loan and continue to have us pay the same amount of interest every month?

Thanks for your feedback!
When you pay the extra, just designate it for principal. Some banks automatically do that, others may not. My deposit slips have a check box for additional payments to be applied to principal. If I do it online any extra payment is automatically payed to principal.

Just check with your bank. It should be easy.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

boomer_techie
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by boomer_techie » Sat Nov 30, 2019 7:44 pm

boomer_techie wrote:
Sat Nov 30, 2019 7:11 pm
Paying off nearly half of the balance of a loan with 20 years to go should convert it to a loan with less than 10 years remaining. Decreasing the monthly payment to bump the term back to 10 to 15 years won't be allowed at that point.
Plugged some numbers into a spreadsheet:

It looks like the original loan balance was about $339000 with a monthly payment of just over $1500. After 10 years of payments (120 payments), if the OP pays off an additional $127000 of principal, and keeps paying the same ~$1500, then the remaining term of the loan is just under 9 years.

Edit: The "under 9 years" is 103 payments and a partial payment. Total amount paid is about $157000 to pay off the $135500 balance. In other words, the amount that went towards interest is only about $21500. (Hardly worth refinancing...)
Last edited by boomer_techie on Sat Nov 30, 2019 8:05 pm, edited 2 times in total.

is1971
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by is1971 » Sat Nov 30, 2019 7:53 pm

boomer_techie wrote:
Sat Nov 30, 2019 7:11 pm
Paying off nearly half of the balance of a loan with 20 years to go should convert it to a loan with less than 10 years remaining. Decreasing the monthly payment to bump the term back to 10 to 15 years won't be allowed at that point.
Yes. i thought about mentioning this, but based on the tenor of the question, I didn't think that the OP would mind if the loan were paid off in under 10 years. In any event, I just crunched the numbers and with no recasting of the loan, the current minimum payment would have the loan paid off in about 103 months (8.5 years).

babystep
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by babystep » Sun Dec 01, 2019 3:46 am

You have the need to borrow for 8 to 9 years. Why would you pay higher rate of 30 years term rather than lower rate of 7 or 10 years ? Please check if you can get no-cost refi at 3% or lower.

Just for an example, let us say the rate is 3% for 10 year, no-cost refi. It saves $500 in the interest cost per year which you can pay towards the principal balance. If you keep paying interest savings towards the principal balance (no change in the monthly payments) then it will not only save you in the interest cost but also shelve about 4 months from the mortgage pay off date.

Also, please checkout the relationship mortgage thread. BofA, Wells Fargo, Citi are doing this.
viewtopic.php?f=2&t=280692&start=300

Other options to check aimloan, sofi, quicken.

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Woodthrush
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by Woodthrush » Sun Dec 01, 2019 4:35 pm

willthrill81 wrote:
Sat Nov 30, 2019 6:53 pm
A 3.5% guaranteed after-tax return is hard to beat these days.

Are you already maxing out all of your tax-advantaged space (e.g. 401k, HSA, IRAs, etc.)? If not, buying stock through those tax-advantaged accounts might be a better option. I would not recommend that you buy bonds through those accounts though since their yield will be less than you're paying on your mortgage; you generally don't want to borrow money at an after-tax 3.5% rate only to lend it out at a pre-tax 2.7% yield.
Yes, we're already maxing out our tax-advantaged accounts (TSP and Roth IRA's), have no debt other than a mortgage and have adequate emergency savings.

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Woodthrush
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by Woodthrush » Sun Dec 01, 2019 4:39 pm

boomer_techie wrote:
Sat Nov 30, 2019 7:11 pm
is1971 wrote:
Sat Nov 30, 2019 6:33 pm


Paying off nearly half of the balance of a loan with 20 years to go should convert it to a loan with less than 10 years remaining. Decreasing the monthly payment to bump the term back to 10 to 15 years won't be allowed at that point.


Sorry, we didn't understand this comment. Can you please explain more fully?

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willthrill81
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by willthrill81 » Sun Dec 01, 2019 4:41 pm

Woodthrush wrote:
Sun Dec 01, 2019 4:35 pm
willthrill81 wrote:
Sat Nov 30, 2019 6:53 pm
A 3.5% guaranteed after-tax return is hard to beat these days.

Are you already maxing out all of your tax-advantaged space (e.g. 401k, HSA, IRAs, etc.)? If not, buying stock through those tax-advantaged accounts might be a better option. I would not recommend that you buy bonds through those accounts though since their yield will be less than you're paying on your mortgage; you generally don't want to borrow money at an after-tax 3.5% rate only to lend it out at a pre-tax 2.7% yield.
Yes, we're already maxing out our tax-advantaged accounts (TSP and Roth IRA's), have no debt other than a mortgage and have adequate emergency savings.
Then unless you're able to write off a big chunk of the mortgage interest or you need the liquidity of something like cash, paying off the mortgage early seems like a slam dunk.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Woodthrush
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by Woodthrush » Sun Dec 01, 2019 4:55 pm

is1971 wrote:
Sat Nov 30, 2019 7:53 pm
boomer_techie wrote:
Sat Nov 30, 2019 7:11 pm
Paying off nearly half of the balance of a loan with 20 years to go should convert it to a loan with less than 10 years remaining. Decreasing the monthly payment to bump the term back to 10 to 15 years won't be allowed at that point.
Yes. i thought about mentioning this, but based on the tenor of the question, I didn't think that the OP would mind if the loan were paid off in under 10 years. In any event, I just crunched the numbers and with no recasting of the loan, the current minimum payment would have the loan paid off in about 103 months (8.5 years).
Thanks for crunching the numbers! Would you mind sharing the basic numbers and how you figured out it would be paid in 8.5 years if we applied the money towards the principal and continued to pay the same monthly amount? Our current outstanding principal balance is $262,514 and monthly mortgage payment (excluding escrow) is $1392 (~$624 principal, ~$767 interest) and there are currently 23 years left on the mortgage. We would be paying $127,000 toward the principal balance. Do you know how much total interest we would pay if we paid it off in ~8 years?

If our monthly payment wouldn't go down by just applying the money to principal without recasting, then wouldn't we have to pay more than our current monthly mortgage payment in order to pay it off in 8 years?

Thanks again

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Woodthrush
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by Woodthrush » Sun Dec 01, 2019 5:15 pm

Thanks for the feedback everyone. We didn't know about re-casting a loan and will check with our lender to see if they'll do it. One basic question we have is would we pay less total interest over the next 8 years if we re-cast the loan rather than just paid the inheritance money toward the principal balance?

If we re-cast the loan, our monthly payment would be lower but we would continue to pay the same monthly payment we are now in order to pay it off sooner - hopefully in 8 years. But if we don't recast and just apply it toward the principal balance, we're assuming our monthly payment would stay the same such that we would have to pay a greater monthly amount than we're currently paying in order to pay it off in 8 years. We don't want to pay a higher monthly payment than we're paying now, so the latter scenario would work for us if that is accurate. Any thoughts?

Admiral
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by Admiral » Sun Dec 01, 2019 8:06 pm

Woodthrush wrote:
Sun Dec 01, 2019 5:15 pm
Thanks for the feedback everyone. We didn't know about re-casting a loan and will check with our lender to see if they'll do it. One basic question we have is would we pay less total interest over the next 8 years if we re-cast the loan rather than just paid the inheritance money toward the principal balance?

If we re-cast the loan, our monthly payment would be lower but we would continue to pay the same monthly payment we are now in order to pay it off sooner - hopefully in 8 years. But if we don't recast and just apply it toward the principal balance, we're assuming our monthly payment would stay the same such that we would have to pay a greater monthly amount than we're currently paying in order to pay it off in 8 years. We don't want to pay a higher monthly payment than we're paying now, so the latter scenario would work for us if that is accurate. Any thoughts?
You need to understand that money (in this case your inheritance) is fungible.

You want to pay less interest. You can do this in one of three ways. You can do so by sending $127,000 to the mortgage company, thereby cutting your outstanding balance while keeping the same interest rate. Your new balance will be lower, you will pay less interest, and the loan will be paid off sooner. The payment, however, remains the same. In this option, you have given up optionality: the 127k is gone. It's not available for investment or any other purpose.

Second: you can take the 127k and dole it out a little bit at a time. Say, an extra $500/month ($6k/year) toward principal. This has a similar effect as option one, except you pay more each month, and the loan term, while shortened, will not be AS short as option 1. You will still save some interest. But, since the principal balance is higher, you will pay more interest overall than option 1. However, here, you've maintained optionality: You still have plenty of the 127k left to invest, or use for another purpose. The cost of this optionality is that you're paying more interest than you have to.

Finally, you could refinance to a lower rate. If you shorten the term, you'll pay more each month, but less interest overall. You could also do this while putting some but not all of the inheritance down on the new loan.

You just need to decide if you need or want optionality on those funds. Saving on mortgage interest is great, but you could also make more money by investing than by pre-paying. Keep in mind also that at the tail end of low interest loans, the last few years have very little interest paid overall (assuming a loan of the size you're speaking of).

boomer_techie
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by boomer_techie » Sun Dec 01, 2019 8:29 pm

Woodthrush wrote:
Sun Dec 01, 2019 4:55 pm
Would you mind sharing the basic numbers and how you figured out it would be paid in 8.5 years if we applied the money towards the principal and continued to pay the same monthly amount? Our current outstanding principal balance is $262,514 and monthly mortgage payment (excluding escrow) is $1392 (~$624 principal, ~$767 interest) and there are currently 23 years left on the mortgage. We would be paying $127,000 toward the principal balance.
In a spreadsheet, the function =FV(3.5%/12,nnn,1392,-262514+127000) will tell you how much you owe after payment number nnn. As it turns out, after payment 115, you'll have overpaid by $445.22. In this case the interest paid is 1392*115-(262514-127000)-445.22 which is $24120.78.
Do you know how much total interest we would pay if we paid it off in ~8 years?
=PMT(3.5%/12,8*12,-262514+127000)

After paying down by $127000, to pay off the remainder at 3.5% in 96 payments, requires a payment of $1620.48. Your interest paid will be (96*1620.48)-(262514-127000), i.e. $20052.08.

lotusflower
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by lotusflower » Sun Dec 01, 2019 9:51 pm

Backing up a step, mortgage interest is simpler than many people think. Every month, your interest payment is just your interest rate times your remaning principal balance on that day (usually the first of the month), divided by 12 (annual rate, monthly payments).

The slightly complicated part is that fixed rate mortgages have a minimum monthly payment corresponding to a 30-year payoff, but that has nothing to do with interest except when when your loan is first originated. So every month, you have to pay ALL of the interest due, all of which has accrued in the last month, since last month you had paid off all the interest due at that time. In addition to ALL the interest, you also must pay enough principal to satisfy the minimum payment. If you ever pay down some of the principal, then every month in the future, less of the payment will be interest than originally planned, and thus more of that payment will be principal and you will keep accelerating the loan payoff.

So now if you have prepaid any principal (especially if it's a big amount like OP is suggesting) then the minimum payment doesn't need to be so high as far as the bank is concerned. That's why they are often willing to recast the loan back to a payment that will stretch back out to the original 30 years, but again that has nothing to do with how interest is due and payable every month. It just affects how much principal you are also required to pay along with the interest.

The only nice thing about recasting to a lower payment is that if you were in some kind of a cash flow crunch the required payment would be lower, so it's part of your emergency planning. If you are not worried about that, then there's no point in recasting since it won't affect interest assuming you still pay the old amount (or more) since you are trying to pay the loan off quickly.

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unclescrooge
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by unclescrooge » Sun Dec 01, 2019 10:39 pm

I would refinance into a 10 year ARM, or 15 year loan, which ever had the lowest rate for zero points and zero closing costs.

A larger loan balance helps get you a no cost loan, so I would wait until after the refinance to pay down any principle.

boomer_techie
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by boomer_techie » Mon Dec 02, 2019 3:05 am

boomer_techie wrote:
Sun Dec 01, 2019 8:29 pm
=PMT(3.5%/12,8*12,-262514+127000)

After paying down by $127000, to pay off the remainder at 3.5% in 96 payments, requires a payment of $1620.48. Your interest paid will be (96*1620.48)-(262514-127000), i.e. $20052.08.
This thread mentions refinancing at a lower rate, so let me run the numbers at 3%:

=PMT(3%/12,8*12,-262514+127000)

At 3% and 8 years, the required payment is $1589.52. The total interest paid is $17079.92, for a savings of $2972.16. That leads to the question: Can you refinance for under $3000, either out of pocket or added to the loan balance?

Hmmm, if $3K of refinancing costs are added to the balance, and you want to pay off this new 3% loan in 8 years, the payment is: $1624.71, i.e. more than if you just stay put in your 3.5% loan.

rterickson
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by rterickson » Mon Dec 02, 2019 12:56 pm

Here is a good calculator if you want to see how extra payments will affect your existing mortgage:

https://www.calculator.net/mortgage-pay ... lator.html

babystep
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by babystep » Mon Dec 02, 2019 11:29 pm

As per OP:
Remaining loan amount is 135,000.
monthly mortgage payment (excluding escrow) is $1392

Interest saving per the below calculator is 23,916.29-19,802.82 = 4113.47

OP,
Please check both the links below and understand the interest savings. When you click on the link then go to the section If You Don't Know the Remaining Loan Term

3.5% and monthly payment of 1392
https://www.calculator.net/mortgage-pay ... monthlypay

3.0% and monthly payment of 1392
https://www.calculator.net/mortgage-pay ... monthlypay

The above two links show that OP will be mortgage free 3 months early.

If no-cost refinance interest rate is 3.25% then interest saving is 2093.15 and you will be mortgage free 2 months early.

lazydavid
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Re: Should we refinance to a 10 or 15 year mortgage?

Post by lazydavid » Tue Dec 03, 2019 3:45 pm

Woodthrush wrote:
Sun Dec 01, 2019 5:15 pm
Thanks for the feedback everyone. We didn't know about re-casting a loan and will check with our lender to see if they'll do it. One basic question we have is would we pay less total interest over the next 8 years if we re-cast the loan rather than just paid the inheritance money toward the principal balance?

If we re-cast the loan, our monthly payment would be lower but we would continue to pay the same monthly payment we are now in order to pay it off sooner - hopefully in 8 years. But if we don't recast and just apply it toward the principal balance, we're assuming our monthly payment would stay the same such that we would have to pay a greater monthly amount than we're currently paying in order to pay it off in 8 years. We don't want to pay a higher monthly payment than we're paying now, so the latter scenario would work for us if that is accurate. Any thoughts?
There's two components here. First is how the interest on the loan works. Each month, you make a $1392 payment, which is automatically divided into 2 parts:
  1. The interest cost to carry the current balance for one month. For your next payment, this is about $767, and goes down over time.
  2. Everything else goes to principal. For your next payment, this is about $624, and goes up over time.
Right now, since you have not paid any extra principal, this works out such that your amortization schedule goes out to the full 30 years of the original loan, and you pay the total amount of interest printed on your origination documents. However, once you pay down additional principal, that automatically reduces #1 above, which results in #2 increasing by the same amount, because your payment does not change. Why is this? To use round numbers, the interest cost to carry $135k for a month is about half of what it costs to carry $262k for a month. So now your next $1392 payment will be comprised of about $395 interest and $997 principal. The principal balance is now falling at a faster rate than the original amortization schedule dictated. This compounds how quickly the interest portion of each successive payment shrinks, which pays off the principal faster, etc. That's why your term shortens so dramatically.

The second piece is how recasting works. When you re-cast the loan, you are essentially saying that though you've reduced the outstanding principal, you do NOT want to shorten the term. The amortization table for the remaining 23 years is rebuilt, which results in a monthly payment of $715 or so--about half of your current payment because it's based on about half of the current principal. You still save on interest, but not as much as if you did not recast the loan. If you recast but keep paying $1392 a month, your payoff goes back to the 8.5 years previously identified. About the only thing this scenario buys you is the option to make a payment as small as $715 in any given month if you choose to. So it's a flexibility/liquidity play.

Topic Author
Woodthrush
Posts: 30
Joined: Thu Dec 28, 2017 10:44 pm

Re: Should we refinance to a 10 or 15 year mortgage?

Post by Woodthrush » Tue Dec 03, 2019 9:50 pm

lazydavid wrote:
Tue Dec 03, 2019 3:45 pm
Woodthrush wrote:
Sun Dec 01, 2019 5:15 pm
Thanks for the feedback everyone. We didn't know about re-casting a loan and will check with our lender to see if they'll do it. One basic question we have is would we pay less total interest over the next 8 years if we re-cast the loan rather than just paid the inheritance money toward the principal balance?

If we re-cast the loan, our monthly payment would be lower but we would continue to pay the same monthly payment we are now in order to pay it off sooner - hopefully in 8 years. But if we don't recast and just apply it toward the principal balance, we're assuming our monthly payment would stay the same such that we would have to pay a greater monthly amount than we're currently paying in order to pay it off in 8 years. We don't want to pay a higher monthly payment than we're paying now, so the latter scenario would work for us if that is accurate. Any thoughts?
There's two components here. First is how the interest on the loan works. Each month, you make a $1392 payment, which is automatically divided into 2 parts:
  1. The interest cost to carry the current balance for one month. For your next payment, this is about $767, and goes down over time.
  2. Everything else goes to principal. For your next payment, this is about $624, and goes up over time.
Right now, since you have not paid any extra principal, this works out such that your amortization schedule goes out to the full 30 years of the original loan, and you pay the total amount of interest printed on your origination documents. However, once you pay down additional principal, that automatically reduces #1 above, which results in #2 increasing by the same amount, because your payment does not change. Why is this? To use round numbers, the interest cost to carry $135k for a month is about half of what it costs to carry $262k for a month. So now your next $1392 payment will be comprised of about $395 interest and $997 principal. The principal balance is now falling at a faster rate than the original amortization schedule dictated. This compounds how quickly the interest portion of each successive payment shrinks, which pays off the principal faster, etc. That's why your term shortens so dramatically.

The second piece is how recasting works. When you re-cast the loan, you are essentially saying that though you've reduced the outstanding principal, you do NOT want to shorten the term. The amortization table for the remaining 23 years is rebuilt, which results in a monthly payment of $715 or so--about half of your current payment because it's based on about half of the current principal. You still save on interest, but not as much as if you did not recast the loan. If you recast but keep paying $1392 a month, your payoff goes back to the 8.5 years previously identified. About the only thing this scenario buys you is the option to make a payment as small as $715 in any given month if you choose to. So it's a flexibility/liquidity play.
We checked into refinancing to a shorter loan and were not able to find a competitive rate, so we're either going to re-cast or pay down the existing loan. We were under the impression that either method would result in us paying the same total amount of interest since we would continue to pay the same monthly amount if we re-casted. And, as you mentioned, since re-casting would give us some flexibility in the event we needed some extra cash on a given month we were leaning toward doing that. However, then we read your comment that we would pay less interest if we didn't re-cast. We're having trouble understanding how this is so. Is there any way you can explain this more fully so we understand? Can you or anyone else on this thread please tell us exactly how much more we would save if we didn't re-cast? If it's a very small amount, then it might not make a difference to us and the benefit of added flexibility with re-casting would likely outweigh the small savings. But if it's a significant amount, then we would need to reconsider and would likely just pay down the existing loan.

Thank you again, all of you, you're help has been truly invaluable!

lazydavid
Posts: 2592
Joined: Wed Apr 06, 2016 1:37 pm

Re: Should we refinance to a 10 or 15 year mortgage?

Post by lazydavid » Wed Dec 04, 2019 7:07 am

Woodthrush wrote:
Tue Dec 03, 2019 9:50 pm
We checked into refinancing to a shorter loan and were not able to find a competitive rate, so we're either going to re-cast or pay down the existing loan. We were under the impression that either method would result in us paying the same total amount of interest since we would continue to pay the same monthly amount if we re-casted. And, as you mentioned, since re-casting would give us some flexibility in the event we needed some extra cash on a given month we were leaning toward doing that. However, then we read your comment that we would pay less interest if we didn't re-cast. We're having trouble understanding how this is so. Is there any way you can explain this more fully so we understand?
Let me clarify. There are a million ways you can slice this, but here are three examples:
  • You pay down the loan to $135k, but do not recast, so your payment remains at $1392. As boomer_techie identified, you will pay about $24k in interest, and the loan will be paid off in 8.5 years.
  • You pay down the loan to $135k, recast, but pay $1392/mo instead of the scheduled payment of $715. The outcome is the same as above, you will pay about $24k in interest, and the loan will be paid off in 8.5 years.
  • You pay down the loan to $135k, recast, and make the $715 payment as scheduled. You will pay about $62k in interest, and the loan will be paid off in 23 years.
You save interest in all three scenarios. In scenario 3, your total interest over the remaining term is about half of what it would be if you did absolutely nothing, because the balance is about half, while the term and interest rate remain the same. But scenarios 1&2 are significantly lower than even this, because only the interest rate stays the same. You are cutting the balance in half AND the term by almost 2/3rds.

Recasting also offers the option of variable outcomes between 2&3, where you sometimes pay your current payment, sometimes pay $715, and other times something in between. There's a whole spectrum of possible total interest paid and ultimate term dates in there.

HomeStretch
Posts: 2968
Joined: Thu Dec 27, 2018 3:06 pm

Re: Should we refinance to a 10 or 15 year mortgage?

Post by HomeStretch » Wed Dec 04, 2019 7:48 am

A recast is useful if you want the ability to make a lower monthly payment in the future due to a change in financial circumstances (liquidity issue, job loss, etc). If the recast fee is small, it can be worth doing to preserve financial flexibility. However, if you have the portfolio to pay off the mortgage or keep making the current monthly payments no matter what, then there is no reason to recast and pay the fee.

Admiral
Posts: 2488
Joined: Mon Oct 27, 2014 12:35 pm

Re: Should we refinance to a 10 or 15 year mortgage?

Post by Admiral » Wed Dec 04, 2019 7:56 am

Woodthrush wrote:
Tue Dec 03, 2019 9:50 pm
lazydavid wrote:
Tue Dec 03, 2019 3:45 pm
Woodthrush wrote:
Sun Dec 01, 2019 5:15 pm
Thanks for the feedback everyone. We didn't know about re-casting a loan and will check with our lender to see if they'll do it. One basic question we have is would we pay less total interest over the next 8 years if we re-cast the loan rather than just paid the inheritance money toward the principal balance?

If we re-cast the loan, our monthly payment would be lower but we would continue to pay the same monthly payment we are now in order to pay it off sooner - hopefully in 8 years. But if we don't recast and just apply it toward the principal balance, we're assuming our monthly payment would stay the same such that we would have to pay a greater monthly amount than we're currently paying in order to pay it off in 8 years. We don't want to pay a higher monthly payment than we're paying now, so the latter scenario would work for us if that is accurate. Any thoughts?
There's two components here. First is how the interest on the loan works. Each month, you make a $1392 payment, which is automatically divided into 2 parts:
  1. The interest cost to carry the current balance for one month. For your next payment, this is about $767, and goes down over time.
  2. Everything else goes to principal. For your next payment, this is about $624, and goes up over time.
Right now, since you have not paid any extra principal, this works out such that your amortization schedule goes out to the full 30 years of the original loan, and you pay the total amount of interest printed on your origination documents. However, once you pay down additional principal, that automatically reduces #1 above, which results in #2 increasing by the same amount, because your payment does not change. Why is this? To use round numbers, the interest cost to carry $135k for a month is about half of what it costs to carry $262k for a month. So now your next $1392 payment will be comprised of about $395 interest and $997 principal. The principal balance is now falling at a faster rate than the original amortization schedule dictated. This compounds how quickly the interest portion of each successive payment shrinks, which pays off the principal faster, etc. That's why your term shortens so dramatically.

The second piece is how recasting works. When you re-cast the loan, you are essentially saying that though you've reduced the outstanding principal, you do NOT want to shorten the term. The amortization table for the remaining 23 years is rebuilt, which results in a monthly payment of $715 or so--about half of your current payment because it's based on about half of the current principal. You still save on interest, but not as much as if you did not recast the loan. If you recast but keep paying $1392 a month, your payoff goes back to the 8.5 years previously identified. About the only thing this scenario buys you is the option to make a payment as small as $715 in any given month if you choose to. So it's a flexibility/liquidity play.
We checked into refinancing to a shorter loan and were not able to find a competitive rate, so we're either going to re-cast or pay down the existing loan. We were under the impression that either method would result in us paying the same total amount of interest since we would continue to pay the same monthly amount if we re-casted. And, as you mentioned, since re-casting would give us some flexibility in the event we needed some extra cash on a given month we were leaning toward doing that. However, then we read your comment that we would pay less interest if we didn't re-cast. We're having trouble understanding how this is so. Is there any way you can explain this more fully so we understand? Can you or anyone else on this thread please tell us exactly how much more we would save if we didn't re-cast? If it's a very small amount, then it might not make a difference to us and the benefit of added flexibility with re-casting would likely outweigh the small savings. But if it's a significant amount, then we would need to reconsider and would likely just pay down the existing loan.

Thank you again, all of you, you're help has been truly invaluable!
I would encourage you to look at ALL available options for that $127,000. You seem to be intensely focused on the interest you will pay, and reducing it, even though you plan to sell the property in 8 years. You have a low mortgage rate. Here's an alternate scenario:

1. Continue to pay the the mortgage you have.
2. Invest $127,000. Let's assume a very low return of 4%.
3. In 8 years, you could have $173,808.27, a gain of about $48,000 (before taxes).
4. At that point, you could use that money to essentially pay off the loan completely.

I would never pre-pay a 3.5% mortgage. At 2% inflation, it's practically free money, even if you don't take the mortgage interest deduction. Do not do a recast. You have the money to pay extra each month and thus are not in a cash flow crunch situation. Therefore I don't see the point in a recast in your situation.

Topic Author
Woodthrush
Posts: 30
Joined: Thu Dec 28, 2017 10:44 pm

Re: Should we refinance to a 10 or 15 year mortgage?

Post by Woodthrush » Thu Dec 05, 2019 6:56 pm

Admiral wrote:
Wed Dec 04, 2019 7:56 am

I would encourage you to look at ALL available options for that $127,000. You seem to be intensely focused on the interest you will pay, and reducing it, even though you plan to sell the property in 8 years. You have a low mortgage rate. Here's an alternate scenario:

1. Continue to pay the the mortgage you have.
2. Invest $127,000. Let's assume a very low return of 4%.
3. In 8 years, you could have $173,808.27, a gain of about $48,000 (before taxes).
4. At that point, you could use that money to essentially pay off the loan completely.

I would never pre-pay a 3.5% mortgage. At 2% inflation, it's practically free money, even if you don't take the mortgage interest deduction. Do not do a recast. You have the money to pay extra each month and thus are not in a cash flow crunch situation. Therefore I don't see the point in a recast in your situation.
If we had more time until retirement we would agree with you and would feel more comfortable with investing it in the stock market. We just can't afford to take the risk that there might be a recession (or crash like in 2007) in the next 8 years and have the principal balance go down just as we need it to buy a home outright for retirement. And we're not in a position to pay more than we are currently paying each month on the mortgage to pay it down in time. If there's a risk-free investment out there that pays 4% or more we would be interested in that, but we're not aware of any. We're open to all suggestions and are giving ourselves a little time to think before acting. But after hearing the feedback on this thread we are most likely going to put the funds toward the mortgage so we're at least greatly reducing the amount we're paying on interest.

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