Refinance Mortgage or Extra Payments?
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Refinance Mortgage or Extra Payments?
Hello,
We are 10 years into our 30yr fixed mortgage at 3.50%. I was thinking of refinancing to lower rates of 2.25% for a new 15-yr fixed mortgage to save interest costs and shave 5 years off payoff date to coincide with our retirement age target. Our monthly payments will increase by $500 which we are fine with. We are not looking to take out equity...just reducing interest costs and years left.
When I played around with mortgage calculators, I realized I can achieve similar results (save interest costs and shave 5 years off) by paying $500 extra on top of my monthly mortgage payments. No need to get the lower interest rate from refinancing. By keeping our current setup, I can also avoid refinance costs and all the paperwork needed.
Am I missing something in my understanding? What is the benefit of refinancing if I can achieve the same results with extra payments while also avoiding closing costs and paperwork hassle?
Thanks!
We are 10 years into our 30yr fixed mortgage at 3.50%. I was thinking of refinancing to lower rates of 2.25% for a new 15-yr fixed mortgage to save interest costs and shave 5 years off payoff date to coincide with our retirement age target. Our monthly payments will increase by $500 which we are fine with. We are not looking to take out equity...just reducing interest costs and years left.
When I played around with mortgage calculators, I realized I can achieve similar results (save interest costs and shave 5 years off) by paying $500 extra on top of my monthly mortgage payments. No need to get the lower interest rate from refinancing. By keeping our current setup, I can also avoid refinance costs and all the paperwork needed.
Am I missing something in my understanding? What is the benefit of refinancing if I can achieve the same results with extra payments while also avoiding closing costs and paperwork hassle?
Thanks!
- ResearchMed
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Re: Refinance Mortgage or Extra Payments?
How can you avoid paying the 3.5% interest on "any remaining balance" if you just pay extra each month?capitalhockey wrote: ↑Mon Oct 18, 2021 5:16 pm Hello,
We are 10 years into our 30yr fixed mortgage at 3.50%. I was thinking of refinancing to lower rates of 2.25% for a new 15-yr fixed mortgage to save interest costs and shave 5 years off payoff date to coincide with our retirement age target. Our monthly payments will increase by $500 which we are fine with. We are not looking to take out equity...just reducing interest costs and years left.
When I played around with mortgage calculators, I realized I can achieve similar results (save interest costs and shave 5 years off) by paying $500 extra on top of my monthly mortgage payments. No need to get the lower interest rate from refinancing. By keeping our current setup, I can also avoid refinance costs and all the paperwork needed.
Am I missing something in my understanding? What is the benefit of refinancing if I can achieve the same results with extra payments while also avoiding closing costs and paperwork hassle?
Thanks!
Wouldn't changing the interest rate be a major factor in refinancing to that 2.25% interest rate?
(Whether the closing costs are so high as to offset any savings with the lower interest rate is a separate question, and depends upon what the closing costs actually would be.)
Perhaps I'm not understanding what you are considering...?
RM
This signature is a placebo. You are in the control group.
Re: Refinance Mortgage or Extra Payments?
We will need your current payment and remaining principal to check your math.capitalhockey wrote: ↑Mon Oct 18, 2021 5:16 pm Hello,
We are 10 years into our 30yr fixed mortgage at 3.50%. I was thinking of refinancing to lower rates of 2.25% for a new 15-yr fixed mortgage to save interest costs and shave 5 years off payoff date to coincide with our retirement age target. Our monthly payments will increase by $500 which we are fine with. We are not looking to take out equity...just reducing interest costs and years left.
When I played around with mortgage calculators, I realized I can achieve similar results (save interest costs and shave 5 years off) by paying $500 extra on top of my monthly mortgage payments. No need to get the lower interest rate from refinancing. By keeping our current setup, I can also avoid refinance costs and all the paperwork needed.
Am I missing something in my understanding? What is the benefit of refinancing if I can achieve the same results with extra payments while also avoiding closing costs and paperwork hassle?
Thanks!
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Re: Refinance Mortgage or Extra Payments?
From my understanding, my extra payments will lower my remaining balance that is exposed to the 3.5% interest. In the long run, that will lower my total interest costs and in essence, lowered my interest rate (doing the math retroactively) - not literally changing to lower interest rate.ResearchMed wrote: ↑Mon Oct 18, 2021 5:21 pmHow can you avoid paying the 3.5% interest on "any remaining balance" if you just pay extra each month?capitalhockey wrote: ↑Mon Oct 18, 2021 5:16 pm Hello,
We are 10 years into our 30yr fixed mortgage at 3.50%. I was thinking of refinancing to lower rates of 2.25% for a new 15-yr fixed mortgage to save interest costs and shave 5 years off payoff date to coincide with our retirement age target. Our monthly payments will increase by $500 which we are fine with. We are not looking to take out equity...just reducing interest costs and years left.
When I played around with mortgage calculators, I realized I can achieve similar results (save interest costs and shave 5 years off) by paying $500 extra on top of my monthly mortgage payments. No need to get the lower interest rate from refinancing. By keeping our current setup, I can also avoid refinance costs and all the paperwork needed.
Am I missing something in my understanding? What is the benefit of refinancing if I can achieve the same results with extra payments while also avoiding closing costs and paperwork hassle?
Thanks!
Wouldn't changing the interest rate be a major factor in refinancing to that 2.25% interest rate?
(Whether the closing costs are so high as to offset any savings with the lower interest rate is a separate question, and depends upon what the closing costs actually would be.)
Perhaps I'm not understanding what you are considering...?
RM
Last edited by capitalhockey on Mon Oct 18, 2021 5:58 pm, edited 1 time in total.
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Re: Refinance Mortgage or Extra Payments?
Current payment is $2700 with 490k remaining balance.pizzy wrote: ↑Mon Oct 18, 2021 5:43 pmWe will need your current payment and remaining principal to check your math.capitalhockey wrote: ↑Mon Oct 18, 2021 5:16 pm Hello,
We are 10 years into our 30yr fixed mortgage at 3.50%. I was thinking of refinancing to lower rates of 2.25% for a new 15-yr fixed mortgage to save interest costs and shave 5 years off payoff date to coincide with our retirement age target. Our monthly payments will increase by $500 which we are fine with. We are not looking to take out equity...just reducing interest costs and years left.
When I played around with mortgage calculators, I realized I can achieve similar results (save interest costs and shave 5 years off) by paying $500 extra on top of my monthly mortgage payments. No need to get the lower interest rate from refinancing. By keeping our current setup, I can also avoid refinance costs and all the paperwork needed.
Am I missing something in my understanding? What is the benefit of refinancing if I can achieve the same results with extra payments while also avoiding closing costs and paperwork hassle?
Thanks!
Re: Refinance Mortgage or Extra Payments?
With those numbers:capitalhockey wrote: ↑Mon Oct 18, 2021 5:56 pmCurrent payment is $2700 with 490k remaining balance.pizzy wrote: ↑Mon Oct 18, 2021 5:43 pmWe will need your current payment and remaining principal to check your math.capitalhockey wrote: ↑Mon Oct 18, 2021 5:16 pm Hello,
We are 10 years into our 30yr fixed mortgage at 3.50%. I was thinking of refinancing to lower rates of 2.25% for a new 15-yr fixed mortgage to save interest costs and shave 5 years off payoff date to coincide with our retirement age target. Our monthly payments will increase by $500 which we are fine with. We are not looking to take out equity...just reducing interest costs and years left.
When I played around with mortgage calculators, I realized I can achieve similar results (save interest costs and shave 5 years off) by paying $500 extra on top of my monthly mortgage payments. No need to get the lower interest rate from refinancing. By keeping our current setup, I can also avoid refinance costs and all the paperwork needed.
Am I missing something in my understanding? What is the benefit of refinancing if I can achieve the same results with extra payments while also avoiding closing costs and paperwork hassle?
Thanks!
Normal repayment: $208,000 interest, payoff in 21 years, 7 months
Normal + $500/month: $160,000 interest, payoff in 17 years
Refi to 15 @ 2.25%: $87,000 interest + refi costs, payoff in 15 years
Refi is the way to go barring any crazy fees.
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- ResearchMed
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Re: Refinance Mortgage or Extra Payments?
Are you not able to afford the payments if you refinance to a 2.25% interest rate?capitalhockey wrote: ↑Mon Oct 18, 2021 5:55 pmFrom my understanding, my extra payments will lower my remaining balance that is exposed to the 3.5% interest. In the long run, that will lower my total interest costs and in essence, lowered my interest rate (doing the math retroactively) - not literally changing to lower interest rate.ResearchMed wrote: ↑Mon Oct 18, 2021 5:21 pmHow can you avoid paying the 3.5% interest on "any remaining balance" if you just pay extra each month?capitalhockey wrote: ↑Mon Oct 18, 2021 5:16 pm Hello,
We are 10 years into our 30yr fixed mortgage at 3.50%. I was thinking of refinancing to lower rates of 2.25% for a new 15-yr fixed mortgage to save interest costs and shave 5 years off payoff date to coincide with our retirement age target. Our monthly payments will increase by $500 which we are fine with. We are not looking to take out equity...just reducing interest costs and years left.
When I played around with mortgage calculators, I realized I can achieve similar results (save interest costs and shave 5 years off) by paying $500 extra on top of my monthly mortgage payments. No need to get the lower interest rate from refinancing. By keeping our current setup, I can also avoid refinance costs and all the paperwork needed.
Am I missing something in my understanding? What is the benefit of refinancing if I can achieve the same results with extra payments while also avoiding closing costs and paperwork hassle?
Thanks!
Wouldn't changing the interest rate be a major factor in refinancing to that 2.25% interest rate?
(Whether the closing costs are so high as to offset any savings with the lower interest rate is a separate question, and depends upon what the closing costs actually would be.)
Perhaps I'm not understanding what you are considering...?
RM
If you can do that, why wouldn't paying similar monthly payments at that lower 2.25% interest rate be better than paying at a 3.5% interest rate, and especially for quite a few years.
(That is, compare "lowering the remaining balance" on the lower interest rate loan vs. "lowering the remaining balance" on the higher interest rate loan. Don't just consider how you benefit from paying extra each month on the higher interest rate loan to "not paying extra each month" on that higher interest rate loan. Compare it to paying more on a *lower* interest rate loan.
You should probably be trying to figure out how much you pay in interest each way.
$490k seems to be a high total to ignore a 1.25% interest rate difference unless it's for an exceptionally short period of time, which this doesn't seem to be...
For example, what is the extra interest on $400,000 for just one year? (The interest would be a bit higher initially, before paying it down from $490k, but this is just for a simple example.)
But again, what are all closing costs? That could tilt the scale so that the lower interest rate isn't the best for your purposes. t
Usually the reason someone doesn't refinance to a lower interest rate is because the closing costs are too high vs. the savings of the lower interest rate. But you haven't shared what the closing costs would be.
OR they can't afford the higher monthly costs of a shorter amortization (e.g., changing a 30 year loan to a 15 year loan). But if you are already planning to pay extra each month, this may not be a problem in your case.
RM
This signature is a placebo. You are in the control group.
Re: Refinance Mortgage or Extra Payments?
Yeah it seems like a no brainer. Even refi into a better 30 year rate, say 2.75% or something, make the payment way lower, and add $1300 or whatever it comes to each month and save a bunch of interest (not as good as the 15, still better than nothing).
The only real caveat to me would be if costs are just super high, which they are in some areas.
Re: Refinance Mortgage or Extra Payments?
The interest rate is the cost of the loan. The interest rate * outstanding balance of the loan /12 (to make it a monthly rate) is the interest you pay every month. The lower the interest rate the lower the cost. The faster you pay off the loan means less balance and less time subjected to the interest rate.
But getting the interest rate as low as possible lowers your cost of borrowing. And shop no cost refi's like explained in the Mega thread.
But getting the interest rate as low as possible lowers your cost of borrowing. And shop no cost refi's like explained in the Mega thread.
Re: Refinance Mortgage or Extra Payments?
Right, it wasn't clear if you were aware of these. You can easily refi at no cost (and of course a higher rate than if you paid the costs). Costs shouldn't be an issue. And paperwork shouldn't be an issue if you have a stable W2 job. You're going to need to send like 10 or 15 pdfs to them, no biggie.
Re: Refinance Mortgage or Extra Payments?
We just went through this on a potential refinance with an investment property which have higher interest rates. Sounded good at 1st glance. There wasn't any out of pocket costs, but fees (and some points) would be added to the outstanding loan balance. Ultimately would have saved something like $35/month but required that we be committed to always paying extra each month. Not likely we would financially ever need to drop the extra payment, but thought it's not worth it to be locked into the higher payment because life is unpredictable.capitalhockey wrote: ↑Mon Oct 18, 2021 5:16 pm Hello,
We are 10 years into our 30yr fixed mortgage at 3.50%. I was thinking of refinancing to lower rates of 2.25% for a new 15-yr fixed mortgage to save interest costs and shave 5 years off payoff date to coincide with our retirement age target. Our monthly payments will increase by $500 which we are fine with. We are not looking to take out equity...just reducing interest costs and years left.
When I played around with mortgage calculators, I realized I can achieve similar results (save interest costs and shave 5 years off) by paying $500 extra on top of my monthly mortgage payments. No need to get the lower interest rate from refinancing. By keeping our current setup, I can also avoid refinance costs and all the paperwork needed.
Am I missing something in my understanding? What is the benefit of refinancing if I can achieve the same results with extra payments while also avoiding closing costs and paperwork hassle?
Thanks!
I was/am also left asking "what am I missing here?"
Instead I thought we'd earmark a separate taxable investment with the extra payment with the hope that the investment account will out earn the mortgage rate (there is no guarantee of that ).
Re: Refinance Mortgage or Extra Payments?
I completely understand the desire to have your home paid off by the time you retire.
However, I would encourage you to consider whether or not a 30 year mortgage could accomplish the same:
* historically low rates
* inflation hedge
* liquidity
* options (you can always pay more or on schedule...up to you).
No one knows the future...I prefer to give myself options in case things don't turn out quite as I had imagined.
However, I would encourage you to consider whether or not a 30 year mortgage could accomplish the same:
* historically low rates
* inflation hedge
* liquidity
* options (you can always pay more or on schedule...up to you).
No one knows the future...I prefer to give myself options in case things don't turn out quite as I had imagined.