Feb 01

I’ve been hearing more confusion lately regarding how and when it makes sense to refinance your mortgage, and thought we’d discuss it a bit today. First, the obligatory graph –


You can see that as recently as 2009, rates were still above 5% and in the 7’s earlier in the decade. This is well above today’s 30 year rate of 3.4% or 15 year rate of 2.7%. Still, there are people who are under the misconception that a refinance on a 30 year mortgage makes no sense if you are half way through it. Nonsense. (Because on a family friendly site, I’m not supposed to say Bull****) It might be silly to refinance when there’s only a year left to go, but you should do the math and see what makes sense for you.

The way a mortgage is paid off, with a 5% rate, a 30 year mortgage will have about half its balance after 20 years. So, with $100,000 left on that $200,000 mortgage, you find a 15 year rate of 3%, higher than I mention above, but with no closing costs. You see that you were paying $1073 per month, and the new payment will be $690. What to do? Here’s the key point – go back and calculate the payment should you choose to use the new rate but pay it off in the 10 years that remain. You see $965. By refinancing and making payments to stay with the remaining term, you still save nearly $110 per month. Each and every month for 10 years. Not bad for a few hours effort to gather up the paperwork.

Should you take the new payment offered? If you have a car loan or other high interest debt, the extra $380 might help you save quite a bit in interest. Are you depositing enough to your 401(k) to get the full match your company offers? You might deposit that $385, pre-tax and have it doubled on deposit. When 10 years pass, the extra money in the 401(k) will far exceed the remaining mortgage balance. The important factor to consider when comparing loans is how the payments compare when using the same term that remains on the old mortgage. It’s easy to drop your payment by extending the loan to 30 years every time you refinance, but that’s a losing game, at some point you want to put the loan behind you. Tonight I answered a question Are there downsides in refinancing with 5 and 1/2 yrs left? I agreed with the fellow asking the question, it’s a good deal, he’ll save nearly $4000 over the remaining 5 years of his mortgage by refinancing.

written by Joe \\ tags: , ,

Sep 05

In the day to day conversations about money there are probably a good dozen recurring themes that are brought up frequently. One of them is refinancing the mortgage, and with rates as low as they are today, the debate of 15 vs 30 year terms is still being tossed around. There are compelling arguments for both sides, after all, wouldn’t it be cool, at say, 25 years of age, to know you’ll live in a fully paid for house by age 40? But wait, wouldn’t it be cooler still to have money owed out at 4% or less but see it grow at 10% per year or more, and 15 years into the mortgage have an investment account worth three times the remaining balance? Good luck, the ’00s would have scared you straight. (Am I the only one that recalls the documentary Scared Straight?)

Back, even in the 90’s the choice was a bit simpler. Mortgage rates were higher and the ratio of the payment for 15 years term was lower. ?? I lost you? Ok, let me walk you through this:

$200,000 LOAN
30 Year 15 Year ratio
7.50% $1,398 7.00% $1,798 1.29
4.00% $955 3.50% $1,430 1.50

I calculated the payments on a $200,000 loan, with rates over 7%, and the rates you’ll see today. You can see that it would have taken a 29% higher payment to bring the 7.5% mortgage down to 15 years and the lower 7% rate. Of course today, we get to start at 4% for a 30 year fixed, but as you can see, the payment is a full 50% higher to pull the term into 15 years. Sound strange? It did to me until I realized that if we took this to an extreme, a loan at zero percent, it would take twice the payment to pay the loan off in half the time. When rates were truly insane (18 percent mortgage anyone?) it would take less than 5% higher payments to knock 15 years off that mortgage.

Note – the 15 year term typically comes with a slightly lower rate, about 1/2%, this isn’t fixed, you need to see what rates your bank offers for each term.

There are some good things to consider before going for the 15:

  • Are you depositing to the match in your 401(k)?
  • Is all higher interest debt paid off?
  • Are you planning to expand the family?
  • Might you or your spouse change jobs or reduce hours?
  • Is your emergency fund sufficiently funded?
  • Have you and your spouse sat down to create a budget that accounts for 100% of your known expenses?
  • Do you have plans for your roof, furnace, air conditioner, hot water heater, and all appliances to be replaced?

You see where all this is going. If you were looking at having your mortgage payment be a reasonable 20% of your income, going for the 15 year term pushes you to commit to 30%. Considering the chunk that goes to taxes, retirement savings, food, etc, it’s this 10% push that may leave you in a bind.

Note, my view of this shifts as one gathers assets over the years, or pays the mortgage down to where the 15 year is a small portion of their income. Our current mortgage is half of what it was when we bought the house, and the rate is also half, so the payment for our mortgage after the last refinance accounts for less than 10% of our monthly income even though it’s a 15 year term.

What do you think? Is a 15 year mortgage risky for you because it ties up too much monthly cash?

written by Joe \\ tags: , , , ,

Jul 07

I have a rental property that had a mortgage with a dozen years left to go. The remaining balance, $72,000 and a rate of 5-7/8%. I recently got a letter from Chase telling me they’d offer a refinance with little effort on my end, no appraisal, no income check. It would cost $1800 in fees, however. The new rate, for a 10 year loan would be 4-3/8. So, a back of napkin calculation tells me I’d save just over $1050 in interest the first year, and would break even by the second year. By pulling the remaining time down to 10 years, combined with the bank adding the $1800 fee to the mortgage,  I wind up with a slightly higher payment, $62/mo higher. But in the end, it’ll be worth getting rid of this mortgage two years sooner and seeing the rent check as an income. That’s what I did yesterday afternoon, talk to Chase for a half-hour or so, and scan/email some forms back and forth.

written by Joe \\ tags: , ,

Jun 15

I used to think the concept of refinancing one’s mortgage was simple, but lately, I’m not so sure. Let me take you through the process with an example of how I’d approach this. You have a balance of $250K on your mortgage and are paying 6%, Your payment is $1791.

You find a 5% mortgage, and the payment is $1342. Wow, nearly $350 per month savings, right? A $3500 closing cost doesn’t look too bad, a 10 month breakeven. Ok, time to think about this. What’s missing? Well, when you told me the payment is currently $1791, I calculated you have 20 years left, on a mortgage that started at nearly $300K. So to understand the savings, you should look at the new rate, but use the remaining time from the old mortgage, got that? In other words, even though it’s a new 30 year mortgage, calculate the payment with the new rate, but a 20 year term. That will give you $1650. This is you actual savings, $140/mo. The $350/mo we first calculated comes at the expense of ten more years of the mortgage. The savings produce a breakeven of 25 months. This may still be worth going after, but it’s far less than you thought, and if you have any idea of moving before then it may not be worth the refinance. Any questions on this approach, post a comment, let me know.


written by Joe \\ tags: , ,

May 25

As I mentioned last week, I’m in the midst of one more refinance.
Today, the appraiser came, and looked around. Given that the loan to value is less than 35% on my guestimated value, I’m not too concerned. On the other hand, I’m always curious how accurate sites like Zillow are.  I don’t care so much what the house is worth. When we move, it’s all relative, if we move into a like neighborhood, the transition would be lateral, sort of a trade. If we trade down, we’ll pocket some money, but that’s not in the plan.

I also just got my credit scores in the mail. There is a bankruptcy score, I scored 476 on a scale of 1 to 600. Never heard of that before. Don’t know if it’s good or bad. Then the actual credit score, drumroll, 800. I trust this to be a FICO score, maybe it’s not. Credit Karma is not quite the same, but close. It had me at 784 the past few months, but dropped me to 782 for the fact that I had this “hard inquiry” in submitting this application. I’d be higher except I have “Too many open accounts with outstanding balances.” Interesting. I pay in full every month and have been using 3 cards. An Amex Open that gives 5% at office supply stores and 3% for gas, and 2 cards from Citibank both giving miles on American Airlines, one an Amex, one a Mastercard. Citibank runs promotions that vary for each card. Also, some stores (like Costco) only take Amex. I suppose after I close on this new loan, purely for research, I can experiment by paying these cards before the statement is cut. The float has little value to me as rates are so low, and it would just be a data point to add to my understanding of how these thing impact the scores. Also I should check my AnnualCredit Report and see if any accounts show open that I meant to close. I had opened a WaMu (Washington Mutual) account as they provided an actual FICO score, but that deal is gone with Chase taking them over. Time to cancel that one.

When it comes to your credit score, some things are counter-intuitive. Refinance to a lower rate, and cancel a bunch of credit cards, grabbing one new one that has no fee and low interest and then max it out consolidating all the high interest debt, and you may very well trash your credit score. It’s all relative though, I can take a hit and easily recover from it. It’s more a science project for me than anything else.

For more reading on this topic, check out The Military Wallet’s article Credit score needed to refinance a VA Loan and Wealth Pilgrim’s 5 Ways to Improve Your Credit Score Fast.


(By the way, today is the 33rd anniversary of the release of the original Star Wars, I can still recite the opening introduction word-scroll)

written by Joe \\ tags: , , ,