Mortgage Re-Fi, am I running the numbers correctly?

[NewJeffCT]

We're looking into possibly refinancing our mortgage on our new house as rates seem to be down from last summer. Last summer, we closed on a 30 year fixed mortgage of about $225K at 6.25%.

Assuming a 2 month close process in a refinance, I calculate that between the 9th month and the 20th month, we'd pay approx $2,742 in principal on the 30 year loan.

However, if we refinance into a 15 year fixed (no way I'm going variable with the dollar as weak as it is now!) with no closing costs at 5.375% (I looked up the rate on eloan.com), we would pay off $11,580 of principal in the first 12 months of the loan.

The payments per month would increase by about $400 per month, but we just paid off a car loan that was $474 a month. And, I've normally paid extra each month for the first 7 months of the loan, anyhow.

Any reason not to refinance? It seems like a slam dunk. Heck, it might even be worth it to look into paying a point even though we may move within 2-3 years.

[MercutioATC]

1. If you're planning to move in 2-3 years, it's not worth it.

If you're determined to pay down principal, just make extra principal-only payments.

Also, be sure to check out "no closing costs" loans. They frequently have some sort of loan origination fee.

[Lex]

2. I wouldn't necessarily refinance, but would send the extra $400

per month marked "pay to principal only"--you'll still be knocking down interest (and thus, the length of the loan) anyway---without having to refinance.

[Aiptasia]

3. If your timeline is to move soon

Than why not go for a lower rate 5/1 ARM loan instead? The rate stays fixed for five years without an adjustment and you'll whup the pants off of standard 15 and 30 year fixed loan rates.

That is, if you really do intend to sell the place and move, that's the loan package I would seek out. If your long term goal is to stay in the home, re-fi at the 15 year rate and pay off additional principal as your budget will allow to get you out from under the mortgage sooner.

That's what i'm currently doing, and i'll be out from under the moneylender within five years.

The old adage in real estate is, re-fi if you can beat your current loan rate (with the same exact terms) by 1% or more.

[NewJeffCT]

4. I'm scared of an ARM at this time

If the real estate bubble does burst, we might have to live in the house for more than 5 years...

Or, if interest rates skyrocket & the bubble bursts that way, we might have to pay 10-12% or more when the 5 years are up...

[DancingBear]

5. Why the 15 yr.?

Depending on what type of mortgage interest deductions you need (i.e amount of yearly income you make) sometimes the 15 yr. is not the best bet. With rates this low, sometimes a longer mortgage term makes sense, as the lower monthly payment allows you (if you are disciplined enough) to invest the difference at a higher rate than the mortgage.

Jeff, if you'd like you can PM me with any questions. My wife is Senior Financial Planner and answers these questions for her clients all the time. She is quite knowledgeable on the subject, and would be able to give you professional advice.