Mortgage Refinance [closed]

Question

My father has a 30 yr fixed loan at 7.5% with 30k principal left with a little over half the term left.

I've been trying to convince him to try and get a cheaper interest rate for the last several months. He is very stubborn and believes that it is impossible to do so. He is on a fixed income any extra savings will help.

He's got some very misguided ideas. He thinks that he owes about 30k on the house because that is the principal but I try to tell him he owes about 100k to 150k.

The house note is around 900$ a month with about half going to principal and the a quarter to interest and the rest for taxes and insurance.

While getting a 4.5% interest rate may not save a lot that extra money at this point(maybe 50 to 100) could be used towards the principal each month to reduce the payoff time.

He says he was told by a banker that there is a law that prevents one from refinancing if you owe less than 30k on principal; which absolutely makes no sense to me.

I do realize most of the interest is paid up front. The problem here is save him. He has about 30k in savings which I've tried to get him to pay off the house in full(or even 10k to 15k) but he's totally against that idea.

So, what I really need answered is if basically I'm right in that 1. It may be possible to refinance to get a cheaper rate which would save him a few dollars a month. This would result in the house being payed off sooner by reinvesting the "saved" money(maybe a year or two extra). 2. Paying off the house in full or nearly so is the best option. Sure the first year would be rough but the extra money saved each money could be saved(although I doubt he would do so) and could be recovered after a few years(rather than being broke for the lifetime of the mortgage).

Other thoughts are appreciated too.

Answer 1

There's a lot of misunderstanding here. Before I attempt an answer, what is the balance on the mortgage? The balance is the principal remaining today, or after last payment. You jump from $30K to "$100-$150K" and I'm sorry, this makes no sense. There is no such law, although banks are less interested in small loans.

By the way, $30K, 15 years to go, 7.5%, would result in $278 in mortgage payment. This doesn't make sense if of the $900 you believe $450 is principal, and $225, interest. If $225 is interest, the mortgage balance is $36,000, but that doesn't reconcile with the $675 to P&I.

All that said, there are fixed home equity loans with no closing cost, no fees at all, and shorter terms. When one has a low balance and fewer than 15 years to go, it's possible to get a lower rate, and short term without having the payment go up much, if at all.

A better understanding of the exact numbers and we can provide more clear advice.

Edit - I read your comments. An example, a 30 yr $200k 6% mortgage will have agents totaling $432k or so. But one doesn't commonly say "I still owe $400k" even though that's what the payments might total.

It's bad to stick with 7.5%, and it's possible to get a cheaper loan. What I'd typically do is take the numbers, find an alternative, and spell out "for a bit of effort, you can either free up $X per month, or keep the payment the same and reduce the time by Y months." the numbers you show still don't add up. Given a correct principal balance, rate, and time remaining, the payment should be what I calculated give or take a penny. No more off than that.

One More Edit - The word 'Principal' is used a number of ways. When you take out a loan, as in my example above, you have $200K in principal. Years later, you have the balance, which is the current Principal due. Then, with each payment, there's a split between Principal paid and interest. When discussing mortgages, what one calls their payment can include property tax and insurance. For the sake of discussing the mortgage itself, these two items are meaningless and should be removed from the discussion. As Mhoran mentions in a comment, they will be due regardless of the facts surrounding the mortgage. Last, except for the sake of proving some point, adding up all future payments is pretty meaningless. And I'll give you a serious easy reason why. $100/yr for the rest of time will sum to infinity. Yet, it has a present value that can easily be calculated once we agree on today's rate. If 5%, that $100/yr is valued at $2000. Far less than infinity.

I added this last edit in the hope that this is clear if/when the endless comments are deleted.