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5 years ago when the market was up I bought I a home. This house was in my means so I had no issues paying it on time for all this time. Now the market is down and the interest rates are about 2.5% lower than my original mortgage. I still owe around $130K from the original $150K Mortgage.

I called my current bank and they told me that closing cost will outset the benefits of refinancing. Something is funny about that. The bank has too much in play to give me that suggestion. So I have been looking on other banks, and they all tell me YES, YES, YES.

Is there any type of calculator that I can use to help me analyze this situation?

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A back of the envelope calculation will get you further and be more understandable than most convoluted lengthy analysis.

You owe $130K. Given the small amount of principal paid in the earlier years, esp with a 30 year mortgage, the savings of 2.5% is $3250 over the first year.

(For those who think this too simple, the balance after 12mo at 30yr 6%, is $128,404, not even $1600 in principal paid, so the average balance over that 12mo is more like $129,200, and the math will show my 'envelope' to be off about $20.)

Geo - remember, the different payments you might see for 30yr/20yr/15yr mortgages do not save you anything (different). Cash flow changes, to be sure, and for some, that certainly comes in to play. You might also consider a no point/no closing cost mortgage, which might have a slightly higher rate, but at no cost at all, it's a no brainer.

Note - my comment above is strictly for the evaluation of the refinance. Assuming a 4% rate, 30yr will have a $620.64 pmt, 20yr, $787.77, and 15yr, $961.59. By taking a shorter term mortgage, you reduce the time and of course you save years worth of interest. That's a valid discussion, and I'd also concede that the 15yr mortgage faster amortization puts my envelope math off by closer to $70. i.e. if you saved 2.5% on the new loan, first year savings is closer to $3180, not the $3250. a difference of a few days to when you'd break even on the refi. If the 15yr payment doesn't bother you, you should see a rate a bit lower, as much as .5%, in fact. This will increase your first year savings, and reduce the breakeven time, just do the math.

If there are any closing costs, the $3250 savings in the first year gives you an idea how quickly you'd break even. Odds are it will be well under a year. For what it's worth, I am on my final refi, 3.5% 15 year rate, the cost this time will be about $2,000 on a $275K loan. All prior refis have been 0/0 deals.

  • Joe, I thought that reducing a mortgage from 30 to 15 years saved you lots of dollars. Why your statement on the 4th paragraph? – Geo Nov 27 '11 at 5:54
  • I added a note after that paragraph to explain. You save quite a bit in fact (by going 15yr) but the refi breakeven isn't impacted that much. – JoeTaxpayer Nov 27 '11 at 14:06
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Is there any type of calculator that I can use to help me analyze this situation?

Refi Caclulators

Use refi calculators to get a realistic picture. Shop around. I'm glad you are not going blindly by what your banks says.

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