Am I calculating my potential mortgage refinancing savings correctly?

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abs9986
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Am I calculating my potential mortgage refinancing savings correctly?

Post by abs9986 » Sun Jul 07, 2019 9:20 am

Old Loan:
Rate = 4.375%
30 Year paying at 15 years (Prepay extra $500 in principal monthly to end 04/2032; note - loan originated 07/2017 and we started prepaying 1 year ago; I plugged the numbers into an amortization calculator factoring this in)

Current Monthly Payment = $844 + $500 = $1344
Original Principal = $169,600
Current Principal = $157,200
Interest Already Paid = $15,000
Remaining Interest = $48,000
Total Remaining Cost of Loan = $48,000 + $157,200 = $205,000

New Potential Loan:
Rate = 3.25%
15 Year (Prepay extra $151 per month to end the loan at the same date of 04/2032; calculated using Excel amortization template)
Monthly Payment = $1104 + $151 = $1255
Current Principal = $157,200
Interest = $35,099
Closing Costs = ~$3500
Total Cost of New Loan = $35,099 + $157,200 + $3500 = $195,799
Monthly Payment Savings = 1344 - 1255 = $89 per month; $89 * 154 remaining payments = $13,706

Final Total Cost = $195,799 - $13,706 = $182,093

So by my calculations, if I stay with the original loan and continue to prepay and finish by 04/2032, the remaining cost is $205,000. Note, I am not counting the interest I have already paid on the current loan as this is a sunk cost (the $15K). The analysis is only about the remaining cost of each option.

If I refinance, the total cost is $182,093 which is a $23,093 (~150/month for 154 payments) savings over the 14 remaining years of the loan.

Did I do my math correctly?

chevca
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by chevca » Sun Jul 07, 2019 9:58 am

Not really. Because your mortgage payment comparisons should just be on the regular payment, IMO. Either way though, you save in interest paid. Especially with a lower rate, which the math does show.

But, doesn't really matter. If you can shave over a point off your mortgage rate, switch to a 15 year mortgage and afford that, and still pay extra towards the mortgage,... that's all the math you need. Done deal! Go for it.

buhlaxtus
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by buhlaxtus » Sun Jul 07, 2019 10:31 am

By comparing over the same time period as the OP did, it should be pretty close. To be strictly accurate you should compute the NPV of the two outflows over the next 14 years, add the transaction fees to the NPV of the new mortgage, and then compare. It'll be a little different than what you came up with here. ... if I'm thinking about it right :)

Old mortgage: NPV(16128 per year for 14 years)
New mortgage: NPV(15060 per year for 14 years) + $3500 closing costs

The result at the end is the same - mortgage paid off - so these should be comparable.


-- easier: calculate the NPV of the difference in mortgage payments (NPV of 1068 per year for 14 years) and subtract the closing costs. Gets the same number.

Topic Author
abs9986
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by abs9986 » Sun Jul 07, 2019 11:13 am

So using the net present value shows an approximate 1,100.0 per year savings which is about $15,000 over 14 years. I'm curious then how my calculations are incorrect since they show about 23,000 savings over the 14 years.

chevca
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by chevca » Sun Jul 07, 2019 12:18 pm

Who cares?

This is a really good refi opportunity for you. What more is there to figure out?

chevca
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by chevca » Sun Jul 07, 2019 12:20 pm

I would refi to the 15 year mortgage you proposed and not prepay another dollar on it. It's a very good rate at 3.25% and that's very close to the time you planned to pay it off anyway. Now, it would just be on autopilot for you after the refi.

buhlaxtus
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by buhlaxtus » Sun Jul 07, 2019 1:59 pm

abs9986 wrote:
Sun Jul 07, 2019 11:13 am
So using the net present value shows an approximate 1,100.0 per year savings which is about $15,000 over 14 years. I'm curious then how my calculations are incorrect since they show about 23,000 savings over the 14 years.
Old loan remaining payments = $1344/mo * 12 mo * 14 years = $225792
New loan: $3500 closing cost + $1255/mo * 12 mo * 14 years = $214340
These numbers don't match your "total cost". How did you compute the interest costs?

Also, I'm assuming you calculated the monthly payments correctly to get a 14 year payoff in both cases.

And I'm assuming the monthly payment is principal+interest only, not including escrowed tax payment or mortgage insurance.

buhlaxtus
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by buhlaxtus » Sun Jul 07, 2019 2:13 pm

chevca wrote:
Sun Jul 07, 2019 12:20 pm
I would refi to the 15 year mortgage you proposed and not prepay another dollar on it. It's a very good rate at 3.25% and that's very close to the time you planned to pay it off anyway. Now, it would just be on autopilot for you after the refi.
This is pretty reasonable too.

Topic Author
abs9986
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by abs9986 » Sun Jul 07, 2019 2:26 pm

buhlaxtus wrote:
Sun Jul 07, 2019 1:59 pm
abs9986 wrote:
Sun Jul 07, 2019 11:13 am
So using the net present value shows an approximate 1,100.0 per year savings which is about $15,000 over 14 years. I'm curious then how my calculations are incorrect since they show about 23,000 savings over the 14 years.
Old loan remaining payments = $1344/mo * 12 mo * 14 years = $225792
New loan: $3500 closing cost + $1255/mo * 12 mo * 14 years = $214340
These numbers don't match your "total cost". How did you compute the interest costs?

Also, I'm assuming you calculated the monthly payments correctly to get a 14 year payoff in both cases.

And I'm assuming the monthly payment is principal+interest only, not including escrowed tax payment or mortgage insurance.
I was incorrect with the 14 years remaining. I have 154 monthly payments left which is 12.8 years.

steadyhand
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by steadyhand » Sun Jul 07, 2019 2:35 pm

How likely are you to stay put for the next few years? If not very likely then the cost of refi may be sunk. Something to additionally consider.

buhlaxtus
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by buhlaxtus » Sun Jul 07, 2019 4:53 pm

abs9986 wrote:
Sun Jul 07, 2019 2:26 pm
I was incorrect with the 14 years remaining. I have 154 monthly payments left which is 12.8 years.
I looked at your math - you double-counted the reduced mortgage payment. The total cost of the new mortgage in your OP is $195,799. The difference between that and the old mortgage total cost should be close to the NPV of the stream of payment differences over 12.8 years.

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grabiner
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by grabiner » Mon Jul 08, 2019 10:07 pm

chevca wrote:
Sun Jul 07, 2019 12:20 pm
I would refi to the 15 year mortgage you proposed and not prepay another dollar on it. It's a very good rate at 3.25% and that's very close to the time you planned to pay it off anyway. Now, it would just be on autopilot for you after the refi.
This may be the right strategy, but to get a fair comparison, you need to look at loans paid off on the same date. Not making the extra payments will increase the total dollars of interest you pay, but that may not cost you anything because the money not used for those payments could be invested.

At 3.25%, I would recommend maxing out a 401(k) and IRA in preference to making extra mortgage payments, but making extra mortgage payments in preference to taxable investing. (At current rates, it's just barely worthwhile for me to make taxable investments in preference to mortgage payments, and that is on a 2.625% mortgage with nine years left on which I can deduct the interest at 24% federal and 8.2% state.)
Wiki David Grabiner

Admiral
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by Admiral » Tue Jul 09, 2019 6:47 am

How much do you value liquidity? I would not pre-pay that 15 year rate, that's crazy. Even if retirement space was maxed, I would invest any excess in a taxable account even if the return was slightly lower than the loan's interest rate, because the money would be available and not locked in my house.

Just do the refi and skip the prepayments.

dawoof
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by dawoof » Thu Jul 11, 2019 9:26 am

grabiner wrote:
Mon Jul 08, 2019 10:07 pm
chevca wrote:
Sun Jul 07, 2019 12:20 pm
I would refi to the 15 year mortgage you proposed and not prepay another dollar on it. It's a very good rate at 3.25% and that's very close to the time you planned to pay it off anyway. Now, it would just be on autopilot for you after the refi.
This may be the right strategy, but to get a fair comparison, you need to look at loans paid off on the same date. Not making the extra payments will increase the total dollars of interest you pay, but that may not cost you anything because the money not used for those payments could be invested.

At 3.25%, I would recommend maxing out a 401(k) and IRA in preference to making extra mortgage payments, but making extra mortgage payments in preference to taxable investing. (At current rates, it's just barely worthwhile for me to make taxable investments in preference to mortgage payments, and that is on a 2.625% mortgage with nine years left on which I can deduct the interest at 24% federal and 8.2% state.)
Where do you find 2.625% mortgage? Is that a local bank? I am looking to refi in WI.

Admiral
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by Admiral » Thu Jul 11, 2019 9:50 am

dawoof wrote:
Thu Jul 11, 2019 9:26 am
grabiner wrote:
Mon Jul 08, 2019 10:07 pm
chevca wrote:
Sun Jul 07, 2019 12:20 pm
I would refi to the 15 year mortgage you proposed and not prepay another dollar on it. It's a very good rate at 3.25% and that's very close to the time you planned to pay it off anyway. Now, it would just be on autopilot for you after the refi.
This may be the right strategy, but to get a fair comparison, you need to look at loans paid off on the same date. Not making the extra payments will increase the total dollars of interest you pay, but that may not cost you anything because the money not used for those payments could be invested.

At 3.25%, I would recommend maxing out a 401(k) and IRA in preference to making extra mortgage payments, but making extra mortgage payments in preference to taxable investing. (At current rates, it's just barely worthwhile for me to make taxable investments in preference to mortgage payments, and that is on a 2.625% mortgage with nine years left on which I can deduct the interest at 24% federal and 8.2% state.)
Where do you find 2.625% mortgage? Is that a local bank? I am looking to refi in WI.
Grabiner's rate reflects 15 year loan rates some years ago. They are not that low now. I refinanced in 2016 and my rate is 2.25%. Just good timing, that's all.

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grabiner
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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by grabiner » Thu Jul 11, 2019 1:36 pm

dawoof wrote:
Thu Jul 11, 2019 9:26 am
grabiner wrote:
Mon Jul 08, 2019 10:07 pm
At 3.25%, I would recommend maxing out a 401(k) and IRA in preference to making extra mortgage payments, but making extra mortgage payments in preference to taxable investing. (At current rates, it's just barely worthwhile for me to make taxable investments in preference to mortgage payments, and that is on a 2.625% mortgage with nine years left on which I can deduct the interest at 24% federal and 8.2% state.)
Where do you find 2.625% mortgage? Is that a local bank? I am looking to refi in WI.
I took out the loan in 2013, and paid 2.75 points to get a lower rate; the APR was 3.213%, and the no-points rate was 3.125%. But I can't get back the closing costs or points by making prepayments on the loan, so I would only get a 2.625% return on any prepayments.
Wiki David Grabiner

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Re: Am I calculating my potential mortgage refinancing savings correctly?

Post by #Cruncher » Thu Jul 11, 2019 5:08 pm

abs9986 wrote:
Sun Jul 07, 2019 9:20 am
So by my calculations, if I stay with the original loan and continue to prepay and finish by 04/2032, the remaining cost is $205,000. … If I refinance, the total cost is $182,093 which is a $23,093 (~150/month for 154 payments) ... Did I do my math correctly?
No. As buhlaxtus says in this post, you're double counting the reduced payments. If both loans are paid off over 154 months with equal monthly payments, I get a net savings of $9,753 as follows: [1]

Code: Select all

1,335.83 = old mo pmt = PMT(4.375% / 12, 154, -157200, 0, 0) 
1,249.77 = new mo pmt = PMT(3.250% / 12, 154, -157200, 0, 0) 
--------
   86.06 = monthly savings
  13,253 = total over 154 months
  -3,500 = closing cost
  ------
   9,753 = net savings
steadyhand wrote:
Sun Jul 07, 2019 2:35 pm
How likely are you to stay put for the next few years? If not very likely then the cost of refi may be sunk. Something to additionally consider.
The monthly savings and reduction in loan balance cover the $3,500 closing cost after about 25 months. If the house is kept for four years, the return on the $3,500 reaches 24% per year.

Code: Select all

       ------ Loan Balance -----     Net
Month  Old Loan  New Loan    Diff  Savings   Return

Code: Select all

    0   157,200   157,200       0   (3,500)
   12   147,862   147,163     699   (1,769)  (88.1%)
   25   137,274   135,916   1,359       10     0.2%  [2]
   36   127,916   126,085   1,831    1,429    17.3% 
   48   117,271   115,022   2,249    2,880    24.1% 
   60   106,150   103,594   2,557    4,220    26.9% 
   72    94,533    91,788   2,745    5,441    28.1% 
   84    82,398    79,594   2,804    6,533    28.6% 
   96    69,720    66,997   2,724    7,486    28.8% 
  108    56,477    53,984   2,493    8,288    28.8% 
  120    42,643    40,542   2,101    8,928    28.8% 
  132    28,191    26,657   1,534    9,394    28.8% 
  144    13,094    12,314     781    9,673    28.7% 
  154         0         0       0    9,753    28.7%
  1. In this post, I make use of the Excel PMT, FV, and RATE functions.
  2. Example calculation for 25 months:

    Code: Select all

    137,274 = FV(4.375% / 12, 25, 1335.83, -157200, 0) 
    135,916 = FV(3.250% / 12, 25, 1249.77, -157200, 0) 
      1,359 = 137274 - 135916 
         10 = 25 * 86.06 + 1359 - 3500 
       0.2% = 12 * RATE(25, 86.06, -3500, 1359, 0)

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