Worth it to refinance mortgage from 4.25% ?

[RaistlinZ]

Since interest rates have fallen over the past year to record lows I was thinking of refinancing, but have some questions. I'm currently at 4.25% fixed. I figure I can get 3.50% or lower since I have an 800 credit score.

If I refinance I would basically start over at my current loan balance, correct? What happens to all the interest I've already paid? Does that go into the ether, or can I still claim that on my taxes?

Thanks in advance.

 

[Wyndru]

Depends how far into the loan you are. I've always been told to only consider if it's at least 1% lower, and the loan is young (i.e. less than 10 years in on a 30).

You will be able to claim the interest you've paid for this year on your taxes, it just starts you over at whatever term you sign up for (30, 25, etc...).

Don't forget about closing costs too, usually they will tell you when your break even point will be which helps with the decision.

 

[xeemzor]

I thought the rule of thumb was to refinance if you can save a point or more. In your case we would need to know bank fees and local taxes to determine the break even time frame.

Yes, you can generally claim all mortgage interest paid on your taxes.

 

[SandEagle]

don't forget that the amortization schedule resets and you'll be paying more interest

 

[Exterous]

It depends on the type of loan. There are some special rules for FHA refinancing that could result in massively higher insurance based on the date you purchased and if you are still required to carry mortgage insurance

 

[tfinch2]

don't forget that the amortization schedule resets and you'll be paying more interest

Edit: Never mind.

 

[Wyndru]

Please explain how he will be paying more interest with a lower rate.

Depending on how far into the loan he is, he might be paying more, because the tables reset, and you are basically back to paying more interest than principle (which is normal at the beginning of a loan).

 

[tfinch2]

Depending on how far into the loan he is, he might be paying more, because the tables reset, and you are basically back to paying more interest than principle (which is normal at the beginning of a loan).

For some reason I thought I read in the OP that he was not far into the loan.

 

[3chordcharlie]

Depending on how far into the loan he is, he might be paying more, because the tables reset, and you are basically back to paying more interest than principle (which is normal at the beginning of a loan).

This would be true only if you refinance and amortize longer than you have remaining on your existing loan.

 

[OCGuy]

There are many things that factor in to this. Anyone who responds to you without much more detailed specifications about your current situation is full of it.

I fund loans for people who are currently in the 4.125-4.5% range every day.

However, there are some people at 4.75% who I turn away because it does not make sense for their situation.

 

[the DRIZZLE]

Depending on how far into the loan he is, he might be paying more, because the tables reset, and you are basically back to paying more interest than principle (which is normal at the beginning of a loan).

No No No. Why do people post this in every mortgage thread? With the same balance and lower interest rate you will always be paying less interest in a given time period. You could end up paying more total interest if you extend the term of the loan, but you can avoid that by paying a bit extra each month. In other words, you can add a bit of extra principal payment each month to payoff the new mortgage in the same amount of time as the old mortgage, but your total monthly payment will still be lower because of the interest savings.

 

[EagleKeeper]

If you keep the length of the loan the same and lower the interest rate; see if the excess closing costs will be compensated by the lower rate.

For myself, I decided that shaving 2 pts and losing $3000 (VA costs) was not worth it.
Started with a 30 yr loan and have paid off enough principal over 3 years to be left with a 15 year loan if I keep my present payment schedule.

Had I not been prepaying; then it would be a no brainer

 

[Wyndru]

This would be true only if you refinance and amortize longer than you have remaining on your existing loan.

I've always been told I have to reset to 30 again, just at the lower rate, which still saves money but resets the loan term and amortization tables obviously.

I've never had the option to maintain the current length of the loan (other than lower time frame, i.e. going from 30 year to 20 year), I didn't even know this option existed?

No No No. Why do people post this in every mortgage thread? With the same balance and lower interest rate you will always be paying less interest in a given time period. You could end up paying more total interest if you extend the term of the loan, but you can avoid that by paying a bit extra each month. In other words, you can add a bit of extra principal payment each month to payoff the new mortgage in the same amount of time as the old mortgage, but your total monthly payment will still be lower because of the interest savings.

What I meant (and I'm guessing SandEagle meant) is that providing you are resetting the term of your loan, your ratio of principle/interest resets, so you will be paying a higher ratio of principle to interest than you were in the previous loan, at least in the beginning.

I understand over the length of the loan that the interest paid will be less, otherwise why would you do it. But in the beginning you will be paying more interest than principle, so in a way a small benefit is you get to claim it on your taxes.

 

[RaistlinZ]

Thanks for the feedback so far.

I am less than a year into the loan and have paid $1,369.58 principal and $2,454.34 interest so far. I'll have to talk to a loan agent and run the numbers to see if the costs would make it worthwhile.

My understanding was that I would start over with a new 30 year loan, new amortization table and all that. Might not be worth my time unless I can shave a full point off my interest rate though.

 

[the DRIZZLE]

I've always been told I have to reset to 30 again, just at the lower rate, which still saves money but resets the loan term and amortization tables obviously.

I've never had the option to maintain the current length of the loan (other than lower time frame, i.e. going from 30 year to 20 year), I didn't even know this option existed?



What I meant (and I'm guessing SandEagle meant) is that providing you are resetting the term of your loan, your ratio of principle/interest resets, so you will be paying a higher ratio of principle to interest than you were in the previous loan, at least in the beginning.

I understand over the length of the loan that the interest paid will be less, otherwise why would you do it. But in the beginning you will be paying more interest than principle, so in a way a small benefit is you get to claim it on your taxes.

I think you are still not understanding the way amortization works. The dollar value of interest you pay is lower in the first month after refinancing, no matter what. (assuming the interest rate difference is enough to make up for the closing costs)

edit: In the US where there are generally no prepayment penalties, you can effectively shorten your term to any number you like by paying extra principal every month. There are free calculators online that you can use to tell you how much extra to pay to accomplish this.

 

[DAGTA]

I've always been told I have to reset to 30 again, just at the lower rate, which still saves money but resets the loan term and amortization tables obviously.

I've never had the option to maintain the current length of the loan (other than lower time frame, i.e. going from 30 year to 20 year), I didn't even know this option existed?



What I meant (and I'm guessing SandEagle meant) is that providing you are resetting the term of your loan, your ratio of principle/interest resets, so you will be paying a higher ratio of principle to interest than you were in the previous loan, at least in the beginning.

I understand over the length of the loan that the interest paid will be less, otherwise why would you do it. But in the beginning you will be paying more interest than principle, so in a way a small benefit is you get to claim it on your taxes.

You can pay extra into the principle each month. You can find calculators and spreadsheets online that can show you how much time it will take to pay off the loan if you add X more each month to your payment. Using those tools, you can set the length of the loan to whatever you like if you are able to make the payment required to achieve that duration.

http://www.bankrate.com/ has many calculators, all free to use.

I recently refinanced after 3 years into my 30 year loan. However, I had been paying more each month and plan to continue to do so. I went into another 30 year loan (it was the best rate) but i'm paying at a rate that will have it paid off in 15 years.

 

[DrPizza]

No No No. Why do people post this in every mortgage thread? With the same balance and lower interest rate you will always be paying less interest in a given time period. You could end up paying more total interest if you extend the term of the loan, but you can avoid that by paying a bit extra each month. In other words, you can add a bit of extra principal payment each month to payoff the new mortgage in the same amount of time as the old mortgage, but your total monthly payment will still be lower because of the interest savings.

And, you're ignoring the cost of the refinance, and possible insurance implications (as already mentioned in this thread.) I could refinance, but because of the costs, and that I have a low balance, I'd end up paying more. (edit: not to mention that at no point have I been able to refi for a lower interest rate - my adjustable rate has always been significantly below the market's fixed rates - only if rates were expected to skyrocket to early 80's levels would it really make much of a difference to me.)

I'll use an extreme to make it obvious: let's say you have 2 months of payments left on your house. - Even if the closing costs are "free", if your time is worth minimum wage to you, it'll come out costing more to you for most people. In between this example, and what you're thinking is a break even point.

 

[the DRIZZLE]

And, you're ignoring the cost of the refinance, and possible insurance implications (as already mentioned in this thread.) I could refinance, but because of the costs, and that I have a low balance, I'd end up paying more.

I'll use an extreme to make it obvious: let's say you have 2 months of payments left on your house. - Even if the closing costs are "free", if your time is worth minimum wage to you, it'll come out costing more to you for most people. In between this example, and what you're thinking is a break even point.

Correct, those things should be factored in as well as how much time you plan to spend owning the house before selling it. My point was to dispel the misconception about amortization.

 

[Doppel]

My guess is no, without looking at your particular situation.

 

[Wyndru]

I think you are still not understanding the way amortization works. The dollar value of interest you pay is lower in the first month after refinancing, no matter what. (assuming the interest rate difference is enough to make up for the closing costs)

Which is why I specified in my previous post RATIO of I to P, not dollar value. I always assumed at the beginning the ratio of I to P was higher and then the interest gradually decreases as the principal increases. Maybe I don't understand amortization then .

So you are saying that regardless of the situation, you will never pay more in interest in that first month, as long as the interest rate is lower...even if you extend the life of the loan, which is what commonly happens in refinances?

 

[DAGTA]

Which is why I specified in my previous post RATIO of I to P, not dollar value. I always assumed at the beginning the ratio of I to P was higher and then the interest gradually decreases as the principal increases. Maybe I don't understand amortization then .

So you are saying that regardless of the situation, you will never pay more in interest in that first month, as long as the interest rate is lower...even if you extend the life of the loan, which is what commonly happens in refinances?

Interest is calculated on the principle owed multiplied by the rate. Amortization says: if I'm going to pay back the principle in this many years, I need to pay this much towards the principle each month. From that point, the interest is calculated. Amortization does not say: if you buy this loan, you must pay this much interest. Interest is calculated as you go for most mortgages. If you pay more principle one month, your interest for the next month will be less than it would have been had you only paid the minimum owed.

Does that help?

 

[DrPizza]

Correct, those things should be factored in as well as how much time you plan to spend owning the house before selling it. My point was to dispel the misconception about amortization.

Ahh, I see what you were saying now. Basically, "Hey, you had a 5% rate for 30 years, you're 15 years into that mortgage and drop the interest to 4% - but spread it back out over 30 years - that will likely result in you paying MORE money in the long run, albeit with much lower monthly payments."

I never realized people were forced into 30 year refis - they can't refi for any duration they want? I could swear that the first time we refinanced our first house, that not only did we get a lower rate, but we also knocked 2 years off what we had remaining - keeping the payment roughly the same. I.e., 7 years into a 30 year loan, knocking the interest rate from A to B, and refinancing for 21 years, instead of the 23 we had remaining, or even a new 30 year.) Is this not an option? Or is this not an option that people bother with?

 

[DAGTA]

To add a bit more clarity, instead of paying x towards a principle amount every month (say, 360 payments of $250 towards principle every month), loans are setup so that the payment can be the same every month with the principle gradually increasing. Were it an even principle payment each month, your total payment would decrease each month as the interest owed for that month decreases with the declining balance owed.

 

[DAGTA]

Ahh, I see what you were saying now. Basically, "Hey, you had a 5% rate for 30 years, you're 15 years into that mortgage and drop the interest to 4% - but spread it back out over 30 years - that will likely result in you paying MORE money in the long run, albeit with much lower monthly payments."

I never realized people were forced into 30 year refis - they can't refi for any duration they want? I could swear that the first time we refinanced our first house, that not only did we get a lower rate, but we also knocked 2 years off what we had remaining - keeping the payment roughly the same. I.e., 7 years into a 30 year loan, knocking the interest rate from A to B, and refinancing for 21 years, instead of the 23 we had remaining, or even a new 30 year.) Is this not an option? Or is this not an option that people bother with?

It is an option, but the rates change. For me, I was able to get a lower rate with a 30 year refi instead of a 15 year. I set up my own payment schedule to overpay each month with the goal of paying off the house in 15 years from purchase date (12 more years from refi). Most loans allow early payoff without penalty.

 

[Wyndru]

To add a bit more clarity, instead of paying x towards a principle amount every month (say, 360 payments of $250 towards principle every month), loans are setup so that the payment can be the same every month with the principle gradually increasing. Were it an even principle payment each month, your total payment would decrease each month as the interest owed for that month decreases with the declining balance owed.

How is that any different than what I said?

Which is why I specified in my previous post RATIO of I to P, not dollar value. I always assumed at the beginning the ratio of I to P was higher and then the interest gradually decreases as the principal increases. Maybe I don't understand amortization then .

What I am wondering....isn't it possible for something like this to happen?

Original:
Rate 5%
Year 1 of 30 - $400 interest $100 principal ($500 total)
Year 5 of 30 - $350 interest $150 principal ($500 total)

After Refinance:
Rate 4%
Year 1 of 30 - $375 interest $75 principal ($450 total)

When it resets, isn't it possible to be paying higher interest, since you are at the beginning of the loan again? You were down to paying 350 in interest prior, and after the refinance you are back to paying $375 (which is still less than when you started the original loan, yet more than what you were just paying before you refinanced). These are rough numbers, please don't analyze as it was just to provide an example.

I never realized people were forced into 30 year refis - they can't refi for any duration they want? I could swear that the first time we refinanced our first house, that not only did we get a lower rate, but we also knocked 2 years off what we had remaining - keeping the payment roughly the same. I.e., 7 years into a 30 year loan, knocking the interest rate from A to B, and refinancing for 21 years, instead of the 23 we had remaining, or even a new 30 year.) Is this not an option? Or is this not an option that people bother with?

Every time we have refinanced (2 times) we were only given the option to reset back to 30, or go to a 20 year. 20 year always ended up being a higher payment (by quite a bit), so each time we always chose the reset to 30 to get the lower payment, and we just keep paying monthly what we originally were before the refi to pay it off a little early.