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I have a loan with 18 years left at 5.125%, with balance of $132k. I pay about $1,020/month ($1350 with escrow and whatnot).

I can refinance to 15 years at 4.00% with closing costs of $967. Monthly payment would be $981. Alternately, I could refinance to 10 years at 4.125% with closing costs of $1,000. Monthly payment would be $1350.

I'm paying an extra $1,000/month to principal and hope to continue this until the loan is paid, barring any big and expensive life events.

I can use Bankrate calculators for the basics, but the extra payment throws a monkey wrench into the equation. My end goal is to be loan-free by 2016, so is the extra savings of the 10-yr loan worth the higher closing costs and the loss of monthly wiggle room the 15-yr would provide?

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    Am I understanding that the 10 year carries a 0.125% higher interest rate vs. the 15 year? – Alex B Nov 17 '11 at 17:13
  • Also, Great Question! +1 – Alex B Nov 17 '11 at 17:14
  • I'm looking at AIM Loan, who did my last refi a couple years ago. They have a range of rates that vary based on closing costs (and within that, some have points and some don't). So yes, the shorter term in this case does have a higher rate. – Nicholai Nov 17 '11 at 21:41
  • You can try the calculators on mortgagemavin.com. They have a really good bunch of more complex mortgage calculators. One of them. You can choose one of the Early Mortgage Payment calculators depending on your situation – EndlessSpace Jan 29 '13 at 2:35
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The math is pretty easy. Closing costs are nearly identical, noise. Take the lower rate, and just keep up the prepayments. Unless you got rates flipped, but either way, the term here is irrelevant, you want the lower rate, period.

Edit - 5.125% $132K PMT of $1020, leads to a remaining time of 15yrs, 9 mo. Please confirm your current numbers are correct.

One caution - looking at your numbers, $1020 payment now, 15 yr payment $981, you might be tempted to see a $39 difference and calculate a near 24 month break even. Which of course is nonsense. If you went out to 30 years and saw a payment closer to $630, almost $400/mo less, a 2 mo breakeven is the same nonsense. Principal payments don't count, your cost of money is the interest you pay. On $132K, 1.125% (savings) is $1485. Your breakeven is about 8 months, even if the term were 10 years and the payment far higher than what you pay now. Other discussions of breakeven focus on cash flow, but you've made it clear that's not your concern, nor should it be if you can pay $1000/mo extra principal.

  • The exact amount I owe is $132,623.84. Maturity date is 2/1/2029. I stay a month ahead so my next payment is due in January. Your explanation of the break event point helps a lot. That's where I was getting lost. It sounds like the 15 year is what I'll do, to balance my hatred of debt and my caution with a wife's salary that's not guaranteed next year. – Nicholai Nov 17 '11 at 21:44
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The interest you'll save in the first year alone is more than your closing costs, so why not, assuming you're not underwater. The only reason to stay where you are is if you anticipate your income dropping significantly. If it did, you would have the lower payment to fall back on.

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    The payment drops with either refi choice. Break even less than a year. – JoeTaxpayer Nov 17 '11 at 3:47

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