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Discussion Starter · #1 ·
At what point is it worth it to refinance a mortgage. I have about 13 years left on a 15 year mortgage and need some advice. Thanks in advance!
 

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You need to look at your current rate vs. the new rate. Is it fixed or ARM?

If it's only been a couple of years, it might be a tough call. You likely already have good rate if you are fixed. Keep in mind that you need to cover the closing costs. Rolling them into the new mortgage affects the decision. You also have to be careful to compare your current loan percentage rate to the APR of the new loan. Those are two different numbers. The first is your "go forward" or sunk costs forward. The APR is the real cost of the refi, including fees and closing costs. If you have a current loan at 6%, the new loan is for 5%, but the new APR with closing is 5.99% then you need to sit tight.

This is a cut and paste from an accounting website regarding when to refinance. You need to pay particular attention to Rule 2, especially if you plan to roll any of the costs into the loan. If you dont' roll them in, there is also a "Time Value of Money" calculation you can do, but basically it means, "What if I invested this money instead". If you wouldn't invest it, then it's a moot point at the very low savings rates these days:

Rule 1: Don't Ignore Total Interest Costs

You really want to use refinancing as a way to reduce the total interest cost you pay. While that sounds simple in principle, it is sometimes difficult to do. The interest costs you pay are a function of the interest rate, the loan balance, and the loan term period.
When people refinance, they tend to focus solely on the loan interest rate. But they often don't pay as much attention to the loan term or the loan balance.
When you use refinancing-even refinancing at a lower interest rate-to increase your borrowing or to extend the time over which you borrow, you often aren't saving money.

Rule 2: Trade Expensive Money for Cheap Money

For refinancing to make economic sense, however, you do need to swap higher interest rate debt for lower interest rate debt. This calculation, however, is tricky. To make an apples-to-apples comparison, you must look at the annual percentage rate that will be charged on your new loan-this is the best measure of the new loan's interest rate cost-and then compare this to the loan interest rate on your old loan.
You don't want to compare interest rates on the two loans nor do you want to compare annual percentage rates on the two loans. Again, just to make this perfectly clear: You want to compare the loan interest rate on the old loan to the annual percentage rate on the new loan--these are two DIFFERENT numbers.

When the annual percentage rate on the new loan is lower than the loan interest rate on the old loan, then you are truly paying a lower interest rate.
Comparing annual percentage rates with loan interest rates seems confusing at first. But note that you would pay only interest on your old or current loan, so that's all you need to look at in terms of its costs. With a new loan, however, you would pay both interest and any origination or closing cost fees. The annual percentage rate wraps the interest rate charges and setup charges, origination charges, and closing cost fees into one interest rate-like number.

Rule 3: Don't Lengthen the Repayment Period
Be careful that you don't extend the length of time you borrow by continually refinancing. For example, one common rule of thumb states that every time interest rates drop by two percentage points, you should refinance your mortgage. However, there have been times in recent history when following this rule would have had you refinancing your mortgage every few years. This could mean that you would never get your mortgage paid off. If you refinanced every few years, you would suddenly find yourself still 30 years away from having your mortgage paid.

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Discussion Starter · #4 ·
Rate

I am currently locked in at 5.50 thru Wells Fargo. I refinanced about 3 years back and went from a 30 year mortgage to a 15 year. I saw this morning that the average rate was 4.45% and supposed to be rising soon. Thanks for yall's help and advice.
 

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What kind of a rate do you qualify for vs. what what you have now. When I married my wife in 2000, the house she had was financed @ 6.25% & she owed a little over 10 years on a 15 year loan. We were able to refinance @ 4 % (Initially 4.25%, but gave us a additional 1/4% for opening a checking account that I put $250 in & have never wrote a check on the account) by putting the house in my name also with a much better credit score. We did have to start over on a fifteen year loan, but my credit union had to cut us a nice check for the difference. In the end it will end up costing about the same, but we were able to build an inground 22,000 gallon pool/spa that we both wanted. I don't know if there are still great deals out there like that now. We refinanced ours when the banks would finance anything for anybody. I still owe 6 years on the house, just like I did when I refinanced, but the years of summertime scenery at the pool has been worth it. ;)
 

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Velinda
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Lenders are in the process of getting rates out now. As of yesterday, 4.25 was the lowest you could get on a 15 yer loan. I'll send a pm when rates are out today.
 

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Rule of thumb is 2point's off your current interest rate. I bought back in 2001 @ 7.0 and refinanced 4 months ago @ 4.75. Making the same payment, and ended up taking ~5years off the morgage. Do your homework and good luck.
 

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Worldangler
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Excellent Response!! We should print this out and keep it for reference. I know I've sent this response to two friends that have been asking me the same questions. Thanks! Greenie for you.

You need to look at your current rate vs. the new rate. Is it fixed or ARM?

If it's only been a couple of years, it might be a tough call. You likely already have good rate if you are fixed. Keep in mind that you need to cover the closing costs. Rolling them into the new mortgage affects the decision. You also have to be careful to compare your current loan percentage rate to the APR of the new loan. Those are two different numbers. The first is your "go forward" or sunk costs forward. The APR is the real cost of the refi, including fees and closing costs. If you have a current loan at 6%, the new loan is for 5%, but the new APR with closing is 5.99% then you need to sit tight.

This is a cut and paste from an accounting website regarding when to refinance. You need to pay particular attention to Rule 2, especially if you plan to roll any of the costs into the loan. If you dont' roll them in, there is also a "Time Value of Money" calculation you can do, but basically it means, "What if I invested this money instead". If you wouldn't invest it, then it's a moot point at the very low savings rates these days:

Rule 1: Don't Ignore Total Interest Costs

You really want to use refinancing as a way to reduce the total interest cost you pay. While that sounds simple in principle, it is sometimes difficult to do. The interest costs you pay are a function of the interest rate, the loan balance, and the loan term period.
When people refinance, they tend to focus solely on the loan interest rate. But they often don't pay as much attention to the loan term or the loan balance.
When you use refinancing-even refinancing at a lower interest rate-to increase your borrowing or to extend the time over which you borrow, you often aren't saving money.

Rule 2: Trade Expensive Money for Cheap Money

For refinancing to make economic sense, however, you do need to swap higher interest rate debt for lower interest rate debt. This calculation, however, is tricky. To make an apples-to-apples comparison, you must look at the annual percentage rate that will be charged on your new loan-this is the best measure of the new loan's interest rate cost-and then compare this to the loan interest rate on your old loan.
You don't want to compare interest rates on the two loans nor do you want to compare annual percentage rates on the two loans. Again, just to make this perfectly clear: You want to compare the loan interest rate on the old loan to the annual percentage rate on the new loan--these are two DIFFERENT numbers.

When the annual percentage rate on the new loan is lower than the loan interest rate on the old loan, then you are truly paying a lower interest rate.
Comparing annual percentage rates with loan interest rates seems confusing at first. But note that you would pay only interest on your old or current loan, so that's all you need to look at in terms of its costs. With a new loan, however, you would pay both interest and any origination or closing cost fees. The annual percentage rate wraps the interest rate charges and setup charges, origination charges, and closing cost fees into one interest rate-like number.

Rule 3: Don't Lengthen the Repayment Period
Be careful that you don't extend the length of time you borrow by continually refinancing. For example, one common rule of thumb states that every time interest rates drop by two percentage points, you should refinance your mortgage. However, there have been times in recent history when following this rule would have had you refinancing your mortgage every few years. This could mean that you would never get your mortgage paid off. If you refinanced every few years, you would suddenly find yourself still 30 years away from having your mortgage paid.

.
 

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I am currently locked in at 5.50 thru Wells Fargo. I refinanced about 3 years back and went from a 30 year mortgage to a 15 year. I saw this morning that the average rate was 4.45% and supposed to be rising soon. Thanks for yall's help and advice.
First, I just want to point out that I'm not a financial adviser. I used to work for a huge bank and did mortgages for a living until the whole mortgage crisis thing and then my entire department along with a lot of other people were laid off. I still have my mortgage calculator though.

One thing that people don't take into consideration when considering a refinance is that the amount you owe will almost 100% for sure go up by some amount even if the bank says that they don't charge any fees. This is because of interest being charged on your loan everyday that you're not making a payment, third party fees like title company, etc. Another thing that is often not considered is that at the longer you are in a loan, the more of your money goes to principle and less goes to interest. In a nutshell, you are paying almost all interest at the beginning of a loan.

Also people sometimes don't consider just how long they will actually be in the loan. If you're only planning on being in the home for a couple of years, in my experience, you almost never break even. If you're planning on being in the house for the remaining term of the loan, then in some cases it can be beneficial to refinance. This is just an example I calculated this morning for a makebelieve 15 year loan. Hope it helps.

Lets say you have a 15 year loan at 5.5% that was originally for $150,000 and you have been in that loan for 3 years as of right now. Your payment, not including taxes and insurance would be $1,225.63. Your current balance would be approximately $128,989.80. If you stayed in this same loan for the remaining 12 years you would roughly pay an additional $176,490.03 to pay the loan off.

Now, lets say that you refinance to a new 15 year fixed at 4.45%. Assuming that after 3 years in your current mortgage you owed $128,989 and you rolled any fees, interest, etc. into your new loan, the new loan would be for (rough estimate) $133,000. This is where is gets a little tricky. If you just made your scheduled payment of $1,014.05 your new loan would be payed off in 15 years from today for $182,528.23 which is three years further down the road and $6,038.20 more than if you just stayed in the mortgage you have right now. On the other hand, if you did the refinance and used the numbers above and continued to make your current payment of $1,225.63 on the lower interest rate, your loan would pay off approximately 11.5 years from today and for a total of $170,478.11 which is a savings $6,011.92 in about the same time as your current mortgage.

Again, I'm no expert; just wanted to help if I could. I wish you the best of luck and let me know if I can help.
 

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Every month I pay $130.40 extra towards my note and have cut the years from 15 down to 12 and saved a ton of interest thats going in the bank for savings. !!!!!!!!!!!!!!!!!!!!!
 
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