Refinancing the Mortgage - Is it actually saving money, well at least in my case?

[Jimmy Higgins]

Rates are really low, lower than even when I got my mortgage 13 years ago. I'd say I'm about 18 to 20 years into that mortgage, having overpaid on the bill consistently. I keep getting hounded by the mortgage company to refinance, and on the surface, it seems like a good deal, but there are two things that keeps hounding me.

1) Why are they hounding me? If refinancing at a lower rate was such a great deal for me, why in the hell would they be doing that? This concern has held me off on looking deeper into this for a while (that and already having what was a historical low mortgage rate to begin with, 5.75%).

2) More importantly, the interest. Yes, the interest rate is low, however, mortgages are interest heavy at the front end of the payment schedule. This means when you first get a mortgage, you are paying out, not on principal, but interest. A refinanced mortgage is no different, there is just a lower rate. I'm so far along on my mortgage at this point, my payments are attacking mainly the principle. So not only is my over the top money attacking principle, so is a lot more of my mortgage check. I think I can kill the remainder of the mortgage in 8 to 10 years. When I was playing with a refinance mortgage calculator, it seemed that while my payment was lower (yeah, but 15 year term), I was nearly going to have to pay the exact same I'm paying now to end in about 8 years.

Am I missing something, or have I confirmed my concern in point 1?

 

[TSwizzle]

I think your rate of 5.75 is pretty high. I refinanced about five years ago for about 3.25. But anyway, they are hounding you because if you refinance now, over the longer term they will make more on interest and hopefully you will refinance again. Refinance may make sense if you get a far lower rate but also shorten the term. I went from 30 year to 15 year. The payments are about the same due to the drop in interest rate, plus I add a little bit for the principal. There is maybe another payment option available in which case you make two payments per month instead of one, i.e. your monthly payment amount is split into two installments. I have this and it is supposed to knock a few years off the length of the loan.

 

[Jimmy Higgins]

I think your rate of 5.75 is pretty high.

But most of that interest was paid several years ago.

I refinanced about five years ago for about 3.25. But anyway, they are hounding you because if you refinance now, over the longer term they will make more on interest and hopefully you will refinance again. Refinance may make sense if you get a far lower rate but also shorten the term. I went from 30 year to 15 year. The payments are about the same due to the drop in interest rate, plus I add a little bit for the principal. There is maybe another payment option available in which case you make two payments per month instead of one, i.e. your monthly payment amount is split into two installments. I have this and it is supposed to knock a few years off the length of the loan.

Multiple payments in a month does shorten the term of the mortgage, but it is a bigger deal earlier on, again, when so much is being paid on interest.

 

[TSwizzle]

But most of that interest was paid several years ago.

I refinanced about five years ago for about 3.25. But anyway, they are hounding you because if you refinance now, over the longer term they will make more on interest and hopefully you will refinance again. Refinance may make sense if you get a far lower rate but also shorten the term. I went from 30 year to 15 year. The payments are about the same due to the drop in interest rate, plus I add a little bit for the principal. There is maybe another payment option available in which case you make two payments per month instead of one, i.e. your monthly payment amount is split into two installments. I have this and it is supposed to knock a few years off the length of the loan.

Multiple payments in a month does shorten the term of the mortgage, but it is a bigger deal earlier on, again, when so much is being paid on interest.

I guess if you are paying mostly principal, then refinancing probably is not a good move unless you want to lower your payments.

 

[jonatha]

But most of that interest was paid several years ago.

No, you're paying 5.75% (/12) every month on the amount outstanding. If you refinance, you'll be paying less in interest. (It should be much less - you don't say where you are, but we refinanced last week for 3% at 15 years).

If you're able to continue to overpay, you should see a net savings, even over 8 years. (We refinanced $300K, expect to pay it off in 2022, and will save about $9K at 3% over the 3.75% we were paying.)

The reason you're being hounded to refinance is the person who originates the loan gets paid to do so. The people to whom you owe the money at present aren't the ones doing the hounding...

 

[Jimmy Higgins]

But most of that interest was paid several years ago.

No, you're paying 5.75% (/12) every month on the amount outstanding. If you refinance, you'll be paying less in interest. (It should be much less - you don't say where you are, but we refinanced last week for 3% at 15 years).

If you're able to continue to overpay, you should see a net savings, even over 8 years. (We refinanced $300K, expect to pay it off in 2022, and will save about $9K at 3% over the 3.75% we were paying.)

The reason you're being hounded to refinance is the person who originates the loan gets paid to do so. The people to whom you owe the money at present aren't the ones doing the hounding...

Taking your comments into perspective and just hardwiring a worksheet, it looks like refinancing at 3.5% for 15 years would allow me to finish off paying the loan in 8 yrs and 9 mths by paying about $100 less. Being as aggressive makes that under 7.5 yrs.

Clearly my thoughts were off... I was comparing the wrong numbers to the wrong numbers. I'd be approach 2x on the the payment they require which dwarfs the interest concern.

I look to save $10k if I save $100 a month. I save $17k if I pay as I have been .

 

[Alcoholic Actuary]

Rates are really low, lower than even when I got my mortgage 13 years ago. I'd say I'm about 18 to 20 years into that mortgage, having overpaid on the bill consistently. I keep getting hounded by the mortgage company to refinance, and on the surface, it seems like a good deal, but there are two things that keeps hounding me.

1) Why are they hounding me? If refinancing at a lower rate was such a great deal for me, why in the hell would they be doing that? This concern has held me off on looking deeper into this for a while (that and already having what was a historical low mortgage rate to begin with, 5.75%).

2) More importantly, the interest. Yes, the interest rate is low, however, mortgages are interest heavy at the front end of the payment schedule. This means when you first get a mortgage, you are paying out, not on principal, but interest. A refinanced mortgage is no different, there is just a lower rate. I'm so far along on my mortgage at this point, my payments are attacking mainly the principle. So not only is my over the top money attacking principle, so is a lot more of my mortgage check. I think I can kill the remainder of the mortgage in 8 to 10 years. When I was playing with a refinance mortgage calculator, it seemed that while my payment was lower (yeah, but 15 year term), I was nearly going to have to pay the exact same I'm paying now to end in about 8 years.

Am I missing something, or have I confirmed my concern in point 1?

I think rates are in the low 3s now, so you could be doing better.

Regarding your second point, I agree that if refinancing doesn't either lower your payment and/or reduce your payoff time then it doesn't make sense.

Regarding your first point, there are many reasons for banks to want you to turn over your loan multiple times - not all of which are to your detriment. (not the least of which are fees, fixed-for-floating interest rate swaps, access to new money/programs). I wouldn't worry too much about their motivation and just focus on your own economic outcome.

I bought a house in April 2015 at 3.75% and refinanced in February 2016 at 3.25% and my payment reduced by $400 per month. It's still 30 years so I will end up paying off the loan over a total of 30 years and 10 months now, but it was worth it to me to do it. Plus if I keep paying at my old payment amount it will be paid off in 24 years.

aa

 

[Loren Pechtel]

It comes down to the costs of the refinance compared to what you expect to save on interest.

It very well might not be in their interest--but it would be in the interest of the sales division that's trying to get you to refinance. They also are probably hoping you'll take some cash out in the process.

Since you're prepaying anyway the extended term doesn't matter--continue to make the same payments you have been doing and it will be paid off faster.

Look carefully at the costs of the refinance, though.

 

[Horatio Parker]

AFAIK, banks make $10k from a deal. That and being a good prospect are why they're hounding you.


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[zorq]

Regarding the motivations, I agree with LP.

They likely are hoping you'll take some cash out of the equity along with the refinance. Also, they get to tack on some new fees, like LP said, check these too.

If you're able to maintain your payments at the rate you've been going, you'll likely save a lot of money.

 

[hurtinbuckaroo]

It comes down to the costs of the refinance compared to what you expect to save on interest.

This is the key. Refi fees can be substantial enough to wipe out the interest savings on a short term mortgage.

 

[T.G.G. Moogly]

Regarding the motivations, I agree with LP.

They likely are hoping you'll take some cash out of the equity along with the refinance. Also, they get to tack on some new fees, like LP said, check these too.

If you're able to maintain your payments at the rate you've been going, you'll likely save a lot of money.

There's no "likely" to it. You WILL save a lot of money if you continue to pay down the loan early.

 

[Loren Pechtel]

Regarding the motivations, I agree with LP.

They likely are hoping you'll take some cash out of the equity along with the refinance. Also, they get to tack on some new fees, like LP said, check these too.

If you're able to maintain your payments at the rate you've been going, you'll likely save a lot of money.

There's no "likely" to it. You WILL save a lot of money if you continue to pay down the loan early.

The question is whether the costs of the refi will save money, not whether paying it down early saves money. Of course paying it early saves money!

 

[T.G.G. Moogly]

There's no "likely" to it. You WILL save a lot of money if you continue to pay down the loan early.

The question is whether the costs of the refi will save money, not whether paying it down early saves money. Of course paying it early saves money!

Sure. Crunch it. Don't have them crunch it for you.