Posted on: 19th Jun, 2011 11:53 pm
loan balance:450,000
current rate: 5%, 30 year @$ 2,486 montly payment.
if i refinance the new rate would be: 3.75%, 15 year fixed with $2800 closing cost apprx= $800 more dollas on new montly payment.
is it worth refinancing or applying the $800 more to principal with the current rate?
current rate: 5%, 30 year @$ 2,486 montly payment.
if i refinance the new rate would be: 3.75%, 15 year fixed with $2800 closing cost apprx= $800 more dollas on new montly payment.
is it worth refinancing or applying the $800 more to principal with the current rate?
How long have you had the current loan and how many years do you plan to be in the home? To give you an even more specific answer what is your marginal tax rate?
I suspect yoe got a good handle on this already – at least you spell with ; only neophytes in the
You might use the approach of applying the closing cost of $2,800 to current balance and then looking at remaining term if you pay the 15-year P&I of $3,273. Resulting term on your current mortgage is 203“ nearly two years more than the refinance option. On top of that lower rates produce faster amortization speeds. This is a factor is you guesstimate that you wot be in property the full 15 years.
Im leaning towards thinking this is worthwhile. A 3.75% rate fits into a 3.5% coupon and this is relatively liquid (3.00% coupon is thin). After raking off a commission youre likely looking at a par rate.
Your existing rate of 5% for a 30-year term offers minimal incentive to refi into a 30-year and hopefully the LO is not pushing 15-year to dazzle you. Worth considering though if cash-flow hit is not too great. Seen a number of folks who have jumped into 10-years only to decides after a year or two that cash flow drag was too heavy and pay another set of closing costs to go back to 30-year.
Work the numbers not rocket science.
You might use the approach of applying the closing cost of $2,800 to current balance and then looking at remaining term if you pay the 15-year P&I of $3,273. Resulting term on your current mortgage is 203“ nearly two years more than the refinance option. On top of that lower rates produce faster amortization speeds. This is a factor is you guesstimate that you wot be in property the full 15 years.
Im leaning towards thinking this is worthwhile. A 3.75% rate fits into a 3.5% coupon and this is relatively liquid (3.00% coupon is thin). After raking off a commission youre likely looking at a par rate.
Your existing rate of 5% for a 30-year term offers minimal incentive to refi into a 30-year and hopefully the LO is not pushing 15-year to dazzle you. Worth considering though if cash-flow hit is not too great. Seen a number of folks who have jumped into 10-years only to decides after a year or two that cash flow drag was too heavy and pay another set of closing costs to go back to 30-year.
Work the numbers not rocket science.
The raw numbers indicate you should for is a lot of other things being equa. Only you can decide whether the cash savings are worth what youe giving up the ability to pay the lesser current payment on any given month if
The number you give appear reasonably consistent not always the case with what LOs receive. Current loan is likely a 30-year with an original balance of $463K and now has 338 months to go.
Id approach it under the standard capital investment NPV approach but leave off the cost-of-capital discount factor. Borrower™ eyes always glaze over when you inquire about their c of c let alone after-tax c of c. My approach is to keep the recovery term short so as to diminish the time-value-of-money factor.
Id compare equal loan terms, i.e., P&I on current loan necessary to reduce term to 180 months. This would be $3,558 compared to the 15-year P&I of $3,272 assuming closing cost were paid in cash. So after 7 months, youve saved $1,253 in total P&I and balance on refinanced loan is $2,002 yove got your $2,800 back and its gravy from that point on. Yep, youve given up some tax deduction for lesser interest paid so you might want to run on an after-tax basis. Your LO can run these numbers with more detail in a couple seconds as long as yre on board with the approach.
The number you give appear reasonably consistent not always the case with what LOs receive. Current loan is likely a 30-year with an original balance of $463K and now has 338 months to go.
Id approach it under the standard capital investment NPV approach but leave off the cost-of-capital discount factor. Borrower™ eyes always glaze over when you inquire about their c of c let alone after-tax c of c. My approach is to keep the recovery term short so as to diminish the time-value-of-money factor.
Id compare equal loan terms, i.e., P&I on current loan necessary to reduce term to 180 months. This would be $3,558 compared to the 15-year P&I of $3,272 assuming closing cost were paid in cash. So after 7 months, youve saved $1,253 in total P&I and balance on refinanced loan is $2,002 yove got your $2,800 back and its gravy from that point on. Yep, youve given up some tax deduction for lesser interest paid so you might want to run on an after-tax basis. Your LO can run these numbers with more detail in a couple seconds as long as yre on board with the approach.
Guest, you're a man (woman?) after my own heart as being one of the few who actually understand what is needed to run an accurate loan comparison.
The typical LO, never mind consumer, hasn't got a clue on the different factors/variables that need to be taken into account when doing a proper cost analysis. This often leads the borrower into a loan that does not fit their time frame, income stream or tax situation - all of which are critical to solving for the right loan to get.
My guess is your background goes beyond just originating loans. Am I correct?
The typical LO, never mind consumer, hasn't got a clue on the different factors/variables that need to be taken into account when doing a proper cost analysis. This often leads the borrower into a loan that does not fit their time frame, income stream or tax situation - all of which are critical to solving for the right loan to get.
My guess is your background goes beyond just originating loans. Am I correct?
Better question is how else are you going to give any meaningful recommendation to a borrower? Excel makes life so easy that Ive got to believe most LOs do something similar. Real problem is that homo sapiens tend to think and visualize in linear rather than logarithmic scales. Ah, the demise of the ! Only thing close to slide rules you can find now and the round ones used as flight aids and whole thinks in circular terms!
Anyway you can see Ive taken some shortcuts that largest of which is to avoid counting the loss of some tax deductions. My fear is that it would make the borrowers eyes glaze over even more and Id have to worry about a potential flip from itemized to standard deduction. I toggle my spreadsheet to allow computation with financed UFMIP although i (I think) deceptive and shortens the breakeven point. If they ca get their money back in 24 months, I tell them not to refinance and this short recapture term offsets my exclusion of the higher taxes at least in my mind. My final sin, is to include a graphic showing total life-of-loan not discounted back to present value. So Im a hypocrite.
Anyway you can see Ive taken some shortcuts that largest of which is to avoid counting the loss of some tax deductions. My fear is that it would make the borrowers eyes glaze over even more and Id have to worry about a potential flip from itemized to standard deduction. I toggle my spreadsheet to allow computation with financed UFMIP although i (I think) deceptive and shortens the breakeven point. If they ca get their money back in 24 months, I tell them not to refinance and this short recapture term offsets my exclusion of the higher taxes at least in my mind. My final sin, is to include a graphic showing total life-of-loan not discounted back to present value. So Im a hypocrite.
There are a few areas I disagree with you. There is no way most LOs run valid comparisons, in fact I'm sure most don't run any comparisons at all. So I guess I was wrong assuming you originated loans, otherwise you would have known this. New guess - teacher/engineer maybe?
I also think tax deductions need to be included into the equation unless the borrower does not itemize as this can have an important bearing on the bottom line. I don't think it is that hard for the average person to understand the concept of after tax numbers if it is properly explained.
Finally, putting a 24 month cap on whether or not to refinance may not be the best advice as everyone's situation is different. I would show a net cost comparison for each year until the loan would be normally amortized and leave it up to the homeowner to decide if it makes sense or not. As with everything, one size does not fit all.
I also think tax deductions need to be included into the equation unless the borrower does not itemize as this can have an important bearing on the bottom line. I don't think it is that hard for the average person to understand the concept of after tax numbers if it is properly explained.
Finally, putting a 24 month cap on whether or not to refinance may not be the best advice as everyone's situation is different. I would show a net cost comparison for each year until the loan would be normally amortized and leave it up to the homeowner to decide if it makes sense or not. As with everything, one size does not fit all.
Sorry, I spent my time out in the not a teacher or engineer. I really do have more faith than you in LOs preliminary analysis particularly in these days of tangible net benefit. Nothing worse than turning in a deal only to have me tell them theres no benefit and the LO will need to tell the customer for something that should haven been prima facia at application.
Yes, there are numerous acceptable reasons for refinancing but my comments addressed R&Ts. Lots of folks come by thinking a slight decrease will be a bonanza when all thethey see is a re-amortization payment for going back to original mortgage term just kicking the can down the road.
Yore correct, of course, on tax benefit loss but its offset somewhat by the implied zero-discount factor on savings at 10% discount a dollar in principal balance is worth 83 cents today and the summation of a $1/month is worth nearly 11% less than the summation. Close enough trade off for me to consider giving worthwhile direction.
Yes, there are numerous acceptable reasons for refinancing but my comments addressed R&Ts. Lots of folks come by thinking a slight decrease will be a bonanza when all thethey see is a re-amortization payment for going back to original mortgage term just kicking the can down the road.
Yore correct, of course, on tax benefit loss but its offset somewhat by the implied zero-discount factor on savings at 10% discount a dollar in principal balance is worth 83 cents today and the summation of a $1/month is worth nearly 11% less than the summation. Close enough trade off for me to consider giving worthwhile direction.