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I'm trying figure out how long it will be to recoup the cost of refinancing our present mortgage.

I'm doing this for 2 reasons a) b/c the interest rate I could get is about 0.75% less than I pay now and b) I want the option of a longer term mortgage, by which I really mean lower monthly payment since I might buy a diff house and rent my present one (so I want a lower rental price to be competitive).

I have tried a couple calculators online (e.g. BankRate) but don't think they really giving me a correct answer, since a) I'm switching number of years of the loan and b) I have being paying a bit more than the minimum monthly payments (online ones seem to let you enter that).

My thought was just use a regular loan calculator (v.s some break even mortgage\refin calculator) and then use:

  • the amount left on my mortgage
  • the % rate
  • the # years left (since I would continue the same payment amount and only change if I actually bought a diff house and rented this one)

This should give me the interest I will pay on the rest of my present mortgage. Then use the same amount and number of years, but uses the new % rate to give me the amount of interest I would pay on a refinanced mortgage.

Then compare the difference in interest paid to the closing costs. If the diff is equal or more than the closing costs (e.g. 4000 less paid in interest v 2000 closing costs) then it is in general a good deal.

Any flaws in my thought process or any other points I'm not taking into account?

llcf

  • Please note that if you do decide to rent out your current home, some mortgage holders will require you to get a new mortgage as things are different when you shift the property from being your primary home to a business property. Also your insurance will change. – kajaco Oct 21 '10 at 15:39
  • @kajaco, Additionally, your property taxes will usually increase substantially when you have a "non homestead" property. This varies state by state, e.g. revenue.state.il.us/localgovernment/propertytax/taxrelief.htm – CrimsonX Oct 25 '10 at 18:22
  • You probably shouldn't directly compare saved interest over the life of a loan to closing costs. The interest savings are spread over 30 years while the costs are all right now. How much is $100 extra in 30 years really worth to you? I bet less than $100 spent now. – Sean W. Apr 29 '11 at 19:15
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Here's a refinance calculator which tells you how many months you will need to be into your new mortgage before you break even (and after which point you come out ahead).

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    I just tried this calculator for refinancing from a 30 year mortgage with 25 years left into a 15 year mortgage. My break even date is 13 months ago (-13). Made me chuckle. – Alex B Oct 25 '10 at 15:24
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If you refinance, you'll reset the term of your loan. If you're already a bit into the loan, then you'll almost certainly be paying more interest total on the refinance than you will just finishing out the loan. So I'm not sure that's a good metric.

If your goal is to lower your monthly mortgage payment so that you have nice positive cash flow on your soon-to-be rental, then do that. First see if you can swing just cutting back on the extra principal you're paying. If that's not enough, then refinance. Refinancing will lower the monthly payment you have to make, especially if you increase the term of the mortgage.

It really depends on whether you want to stay in the house or not. If you're staying in the house, refinancing may or may not make sense depending on how much time is left on the loan. Payback time will probably be four to five years. If you're going to rent out the house, then a margin of safety is good, and the required payment on that mortgage should be as low as possible. At this point, the property is income-producing, so getting rid of your debt on the property is less of a concern than if it weren't (assuming, of course, that you have more income than expenses).

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