I got 30 years loan for 232K two years ago with interest rate of 4.25% and now I am planning to refinance again for 15 years. Financial company mentioned they can provide interest of 2.85% but the problem here is if I sum up all the amount then whatever I paid this two year is waste because I end up in loan amount more than my previous loan amount. Any place that I can save some cost? My credit score is good and I never missed any point. Your help is highly appreciated.

Purchase Price/Payoff $226,500.00
Total Estimated Closing Costs $3,113.25
Total Est. Reserves/Prepaid Costs $886.46
Discount Points $4,710.00

Total Costs $235,209.71

Loan Amount $235,500.00
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    You're paying 2 points ($4710 = 2% of the mortgage) to buy a lower rate. That's a perfectly reasonable thing to do if you believe you're going to stay in this home for a long time and that you won't want to refinance before you pay off the loan. It's a very costly mistake if you think you might move in the next few years. I would hope whoever gave you this quote talked through this with you in some detail. – Justin Cave Oct 8 '19 at 19:33
  • The initial balance of the loan is not (that) important. You will be paying substantially less interest on the new loan; combined with the higher monthly payments of a shorter term, you will be paying down the new loan much faster than your current loan, and at some point in the near future, your balance will be less than it would have been if you hadn't refinanced. – chepner Oct 8 '19 at 19:36
  • @chepner Thanks for your comment. Do you think 2.85% is a good rate or do you want me to shop around for better rates – user10930212 Oct 8 '19 at 19:40
  • @JustinCave I am planning to rent this home mid of next year. Do you think its advice-able for refinancing this property? – user10930212 Oct 8 '19 at 19:41
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    Make sure that you don't have to sign another intent to occupy agreement with the refinance or you will not legally be able to turn it into a rental until that agreement has expired. – Hart CO Oct 8 '19 at 20:01

The important figure is how much interest you are saving each month by refinancing, which is what offsets the upfront cost of refinancing over time. (For simplicity, I'm ignoring the increase in your monthly payment realized by moving from a 30-year to a 15-year mortgage and assuming you are OK with the trade-off to pay down the principal faster.)

On your initial mortgage, you started paying ~$820/month in interest, and that amount decreases over time. After 2 years, you are paying ~$793/month.

On your new mortgage, you will start paying ~$560/month. That means in the first month alone, you have have saved ~$230. Even if the amount of interest you owe decreases at the same rate in both mortgages (spoiler: it does not; it decreases more quickly with the new one), you would expect to break even after $8700/230 = 38 months. (Because if the faster pay-down rate, the breakeven point will actually be somewhat less than 38 months.) Pay the mortgage off sooner, and you would have been better off not refinancing; otherwise, you'll come out ahead.

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  • thanks for your comment. Can you explain me little more about what you mean by "Pay the mortgage off sooner, and you would have been better off not refinancing; otherwise, you'll come out ahead." – user10930212 Oct 8 '19 at 20:19
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    The break even calculation really ought to include the time to recoup the closing costs and the discount points-- you'd have to repay those before the refinance actually breaks even. Ideally, a version with and without the discount points would be helpful to separate the decision to refinance from the decision about how many points to pay. – Justin Cave Oct 8 '19 at 20:21
  • Let's take an extreme example, and say you would pay the entire mortgage off after one month. With your original mortgage, that means you would have paid an additional $793 in interest. With your new mortgage, that means you would have paid $560 in interest. So you "saved" $233 in interest, but you had to pay $8700 up front to do so. That means you have to be making payments over enough months so that your accumulated monthly savings actually exceed what you paid to refinance. – chepner Oct 8 '19 at 20:22
  • @JustinCave Agreed. The original question doesn't indicate what the interest rate would be without the discount points, so it's hard to say when the breakeven point would be. Interest payments would be higher, but closing costs would be lower. – chepner Oct 8 '19 at 20:30

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