I would refinance. I would have invested whatever amount you paid in extra principal when the market was down last March/April but it's too late for that. With the new loan you should be paying about 2:1 principal to interest vs what you have now.

I understand your need to see the math. Go do the math. If you can’t though just trust that it will save you a boatload. I was trying to be nice earlier. If someone says it lowers your effective rate that is nonsense. Pay extra principal certainly, but do it on a much lower rate. Increase your bang for your buck.

Just do it. You can figure out the math later.

WSJ today said rates are going up.
We are delighted to refi from 3.125 to 2.5.
Will save 50K over 15 years, interest paid is absurdly low, principal paid per month much higher.
It is truly a no-brainer.
I’d advise locking I that date if you an still get it.

Reducing your interest rate by half is a no brainer. Refinance today. Your current payment times 108 (9 years) is huge, provided it doesn’t make your current payment unmanageable.

This message has been edited. Last edited by: sigcrazy7,

Even that doesn’t matter. Refinance out to 30 years again and if you just paid extra principal up to what you are paying today you would still be better off.

Literally there are almost no scenarios where this refi isn’t a GREAT idea. Fuck the math, trust us you can’t lose unless the cost is crazy outrageous and I mean crazy like unheard of outrageous. Don’t waste time talking, go lock in the best rate you can. You hav3 a bad rate right now. You are over thinking this. Lock in, bring back the details we will do the math for you. Lol

I'll join the chorus...

Basically, unless you plan on moving in the very near future before the rapid breakeven (e.g. sometime this year or early next year), the refi is going to work out greatly in your favor.

Barring that, the only other major things to check on are to ensure that your current loan doesn't have some major penalty for early payoff, and that you're not going to have to pay some ridiculously high out of pocket closing costs. (Neither of those are usually a concern, but you'll want to check to be sure.)

And make sure that the refi loan also has no prepayment penalties or any restrictions on paying extra on the principal every month. Presumably you will also have more than enough equity-to-loan value that PMI doesn’t come into play either.

I know prepayment penalties exist but I’ve never actually ever seen any kind of loan with one. House, cars, I even did a loan on a gun once, as a young young man. Never seen one. If you ever do see one, run. That’s an instant deal breaker.

Many states, if not all, prohibit prepayment penalties on residential mortgages. Also, since it’s highly unlikely that your loan won’t be/isn’t already a Freddie/Fanny loan, there’s almost a zero chance that it has a prepayment penalty.

I’ve only seen them on commercial loans that are funded by private equity with no government involvement. For better or worse, the federal government runs the residential mortgage business as a monopoly.

quote:

Originally posted by pedropcola:
I know prepayment penalties exist but I’ve never actually ever seen any kind of loan with one. House, cars, I even did a loan on a gun once, as a young young man. Never seen one. If you ever do see one, run. That’s an instant deal breaker.

I suspect that I am older than you. Back in the day, lenders computed monthly interest amounts using the "Rule of 78s" which had a built in implicit prepayment penalty. It was used on almost every car loan made in the 1950s thru the 1970s. The loan documents would refer to the Rule of 78s.

Currently, conforming residential mortgages do not have any implicit prepayment penalty.

You can NEVER lower the RATE by increasing the principal payments. You can lower the AMOUNT of interest by paying extra, but not the RATE.

In the weeds: It is called the Rule of 78s for the following reason- 78 is the sum of 1 thru 12. First the lender would compute the total interest using the quoted annual percentage rate. The amount of interest charged for the first month was 12/78 times total interest; the second month was 11/78; and so on until the last month was 1/78 of the total interest. If you made all payments on time you paid the quoted rate, if you paid off early you paid a much higher rate.
https://www.investopedia.com/terms/r/ruleof78.asp

I just went through this. I am a little over halfway through a 30 year loan. Interest rate of 4.25%.

In the last two years I have been paying extra, sometimes 1/2 the normal payment, sometime a full payment. Lately I have been doing 1.5-2.5 times the normal payment.

But a little while ago, when rates for a 15 mortgage where 2.25%, I looked into refinancing.

My breakeven point was about 4 years. If I paid the house off within 4 years, I was better off sitting at 4.25% and not doing the re-fi. Over that and I would be better off doing the re-fi.

My goal was to pay off the house in 5 years. At the 5 year mark, it would have saved me about $1,000. But I had no desire to go through all the hassle of a re-fi to save $1,000.

What I did was plug in the loan balance into a mortgage calculator. And I changed that calculator to 2 years, then 3 years, then 4 years, then 5 years, etc. That gave me the total interest paid for each loan at each interest rate. I was then able to compare the difference in loans based on when I thought I might pay off the loan. That was how I arrived at the breakeven point of 4 years.

Holden, looking at your numbers, 4 years to breakeven from 4.25 to 2.25 seems off. By a lot.

Maybe I will learn something today but your method to figure break even isn’t correct. The correct way is to combine all actual costs of refi points, assessments, fees, etc into one number then divide that number by the decrease in your payment. That is how many months to break even. Then you pay as much extra principal as you want to get to your desired payoff date.

I don’t believe your method to be correct and it’s giving you a wonky breakeven time frame.

quote:

Originally posted by pedropcola:
Holden, looking at your numbers, 4 years to breakeven from 4.25 to 2.25 seems off. By a lot.

Yep. Unless there was something serious wonky with that refi (like ridiculously high closing costs, or you were having to buy a bunch of points to get that 2.25% rate), breakeven on the average 4.25 to 2.25 refi ought to be somewhere around the 1 year mark, give or take a few months, depending. And if you had been paying that much extra towards your principal, it could very likely have been well under 1 year.

Rather than plugging it into a mortgage calculator and fiddling with the number to find what you think is the breakeven, try a dedicated breakeven calculator instead.

Rogue, you can be my wingman anytime. Lol

Bullshit, you can be mine.

(We definitely seem to have very similar mindsets and analytical approaches when it comes to financial matters, as evidenced in several recent threads.)

Plus whenever you can work Top Gun into a conversation it’s a good day. Lol

quote:

Originally posted by pedropcola:
Holden, looking at your numbers, 4 years to breakeven from 4.25 to 2.25 seems off. By a lot.

I spoke to professionals about this, more than one. My understanding is that part of it is the state of Florida and what they require. There is tax on a new loan. And then there is all the other required things; title services, inspections, etc. It did not seem like we could get the costs below $4K. So to absorb those costs, and then pay off the loan in 3 years I would have been worse off than had I just stayed put.

And there is also the hassle factor. Refinancing a mortgage is a pain in the a$$. I am self employed, so that makes it even more of a pain.

I used the money to pay off one car, boom, $1K in interest saved. Then with a few clicks of a mouse, refinanced the other car and saved 3% points on that loan. It was WAY easier than a home re-fi.

quote:

Originally posted by holdem:

quote:

Originally posted by pedropcola:
Holden, looking at your numbers, 4 years to breakeven from 4.25 to 2.25 seems off. By a lot.

I spoke to professionals about this, more than one. My understanding is that part of it is the state of Florida and what they require. There is tax on a new loan. And then there is all the other required things; title services, inspections, etc. It did not seem like we could get the costs below $4K. So to absorb those costs, and then pay off the loan in 3 years I would have been worse off than had I just stayed put.

And there is also the hassle factor. Refinancing a mortgage is a pain in the a$$. I am self employed, so that makes it even more of a pain.

I used the money to pay off one car, boom, $1K in interest saved. Then with a few clicks of a mouse, refinanced the other car and saved 3% points on that loan. It was WAY easier than a home re-fi.

Being an Excel whisperer and a numbers guy, I couldn't help but run the numbers.

The mortgage tax in Florida is only $350 for every $100,000 in loan. So the bulk of that $4,000 in loan cost must be some other things like maybe point or origination fees.

In any case, if the loan amount is $100,000 with $4,000 costs in securing the loan, the break even point is 42 months. So I can see how it wouldn't have been wise. $4,000 is more than 5 months of payments. And the difference in monthly payments going from 4.25% / $752 monthly to 2.25% / $655 is just $100.

That's why the no brainer part of refinancing to a lower interest rate is only if you're not incurring significant costs in securing the lower interest rate.

It's $.70 per $100 except in Maimi-Dade where it's $.60 per $100, so a $300,000 mortgage would be $2,100 in most of Florida. Other fees could be an appraisal for $400, maybe a home inspection for another $400, and who knows what else.

Does it really matter? The man ran his numbers and came to his conclusion. He offered solid advice to the OP as well.