What to ask or know before mortgage refinancing?

[M A V I C]

AlphaDog wrote:
You know, I'm getting even more confused about these "modifications" than I thought. I was under the impression that modifications were for people with financial need, not financial want. If someone can qualify for a refinance to a lower rate at no cost, why would they want to go through a modification process similar to what you described?

There are multiple types of modifications. Some are enabled by the "Making Home Affordable" program and some are done by the banks themselves.

I'm not saying that they go through the MHA program as not all modifications go through that. I think most don't.

I have yet to see a no-fee refinance. I'm not saying they're not out there, I just haven't seen them. The fees may be hidden may be hidden in multiple ways including as a higher interest rate (eg, dropping down to 5.25% instead of 5% - the .25% is the refinance fee.)

A non-MHA modification usually has an up front fee of a few hundred dollars. It simply lowers your interest rate without making other changes to your loan.

Let's say you're 7 years into a 30yr fixed mortgage of $300k at 7%. You want to lower your rate. Your current payment is $1995.91. The total you'll pay for the loan is $718,562.69.

At 7 years, you will have paid $142,693.55 in interest and about $26,059 in principal.

If you were to refinance into a 30yr fix at 5%, the total you will pay from that point on is $655,888.46. Since you've already paid about $168,752, the final you end up paying for the loan is $824,640 - well over $100,000 more than if you had just kept your interest rate at 7%.

That said, your payment will be $173/mo less. So if you apply that to your principal each month, you only end up paying $553,127 from that point on. Add your previous payments to that, and the loan cost you $721,879 - $3k more than if you hadn't refinanced. This is assuming it was a no-fee refinance.

So if you're going from 7% to 5% after 7 years, it's not worth it.

A modification, however, will save you money. Going back to the original figures, if after 7 years you drop your interest rate from 7% to 5% on the remaining balance, from that point on you will end up paying $427,748. Add that to what you've already paid, and that's a total of $596,500 - over $225,000 less than if you refinanced.

Plus your payments are only $1672.15. Put that $300+ into your payment and it drops even more.

Someone may want to double check my math. I used http://www.bankrate.com/calculators/mort...lator.aspx for the amortization calculations.

[Buzz]

discipline is the name of the game; if possible, do not extend the term of the loan, otherwise the temptation to pay less each month will likely end up costing you more if you're in it for the long haul. lowering the rate is terrific, but to realize its advantage, you should take a comparable, or shorter, loan term, OR have the discipline to pay at least as much each month to be the equivalent of that comparable or shorter loan term. that's it; lower rate = better for you if you have discipline to realize its benefit. also check to make sure there are no draconian penalties that can bite you in the butt... such as being on vacation, or dealing with a sick relative that causes a late payment triggering a default interest rate for the rest of your life. IOW just make sure that you can live with any ill effects should any penalty clause ever be invoked; if any penalty clause makes you think you couldn't/wouldn't want to deal with it; negotiate it out, or down, or do not take the loan. good luck.

[davester]

If the interest rate is lower on a no-fee loan and there is no prepayment penalty (there seldom is) then go for it. It is silly to avoid saving yourself money because you're worried about the loan period. If you're worried about the clock, simply add a set amount to your payment that goes to extra principal enough so the loan period gets shortened to match your current loan period and then the clock won't reset. The clock is only in your mind. You can generally pay as much as you want above the standard payment and therefore have whatever loan term you want.

If you're at all close to the 15 year mark on your original loan then you should consider refinancing to a 15 year mortgage, which will have a lower interest rate and therefore save you even more money in the long run.

edit: I just noticed Buzz's post above. Yes, you do need to exercise discipline. I've never had an issue with this. I simply set up my bank account to automatically pay the mortgage plus added principal out of my checking account and then forget about it.

[sunfalcon]

We refinanced last December - went from 6.25% to 4.5%. I refinanced with a 30 yr loan, but am on the 10-year payoff track. Figured that if something went wrong and our income diminished, we could fall back on the 30-yr payment in the interim. We had had the house for 4.5 years at that point. Plan on staying here until I can't walk up the stairs anymore Hopefully a long time.

After a year, so far, so good.

[M A V I C]

davester wrote:
If the interest rate is lower on a no-fee loan and there is no prepayment penalty (there seldom is) then go for it. It is silly to avoid saving yourself money because you're worried about the loan period. If you're worried about the clock, simply add a set amount to your payment that goes to extra principal enough so the loan period gets shortened to match your current loan period and then the clock won't reset. The clock is only in your mind. You can generally pay as much as you want above the standard payment and therefore have whatever loan term you want.

If you're at all close to the 15 year mark on your original loan then you should consider refinancing to a 15 year mortgage, which will have a lower interest rate and therefore save you even more money in the long run.

edit: I just noticed Buzz's post above. Yes, you do need to exercise discipline. I've never had an issue with this. I simply set up my bank account to automatically pay the mortgage plus added principal out of my checking account and then forget about it.

Look at the numbers in my post, those numbers prove the clock isn't just in one's head. It's how amortization works. When you refinance, this gets started all over again. In the example I gave, someone could lower their interest rate by 2% and still lose a couple hundred thousand.

[davester]

MAVIC, your math is wrong and what I said about the clock only being in your head is correct. I checked it since the numbers seemed impossible and I'm currently doing some real estate transactions and you scared me for a moment. The payment drops by $530 when refinancing the remaining principal to 5% after 7 years, NOT $173.

Running your 7% for 7 years, refi to 5%, plough the payment savings back in scenario results in a loan that is paid off in 34 years at a total cost of $574830 (P+I) versus $718563, a significant SAVINGS.

There is no way that refinancing at a lower interest rate can net you a loss unless you go with a loan with fees. It is simply not logical. As for the "hidden fees" you are worried about, it simply doesn't matter just so long as the fees are included as part of the interest rate. The underlying wholesale interest rate is irrelevant to the consumer for a refi. It is important when you first take out a loan because you can use points as a tax writeoff. However for a refi you can't, so only a fool would do a refi loan with points.

[thermarest]

Hm. 26 posts and only 1 by the OP. Maybe he figured it out?

I don't have much wisdom to add, but this page has good financial calculators and a whole section of mortgage related things if one doesn't want to make their own spreadsheet:

http://www.dinkytown.net/

[M A V I C]

Davester, you're right. I screwed up my math on this one. I just went back to double check it and I must have entered a shortened loan period. The amount the payment drops by is $530.

davester wrote:
Running your 7% for 7 years, refi to 5%, plough the payment savings back in scenario results in a loan that is paid off in 34 years at a total cost of $574830 (P+I) versus $718563, a significant SAVINGS.

The calculator is currently down so I can't check that. One thing I do want to comment on is...

There is no way that refinancing at a lower interest rate can net you a loss unless you go with a loan with fees. It is simply not logical.

Because of amortization it can cause problems and it is most certainly logical. A couple years ago I was looking at refinancing from 7.25% to 6.25% and when I ran the math (many times and many ways) I found that I would end up paying more in the long run if I didn't get a rate below 6.25%. I couldn't, so I didn't refinance. The broker we were working with confirmed it wouldn't save us anything.

And this is all assuming that the difference in payment is put back in as an extra payment towards principal.

[Greg]

Wow - thanks. And wow - sorry about the delay in responding.

Running the numbers shows that we'd be paying a bit more over 30 years, but also a bit less every month. On balance, the bit less outweights the bit more, so that's that.

In other words, I ignored the long run. This is mostly because we're only three years in, but also because our monthly budget is done, well, monthly. So having x dollars every month to pay bills or handle unforeseen expenses is of more benefit than spending 27x over the long term.