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I'm looking at refinancing my $290,000 mortgage (present is 30 yr fix, and with 26 yrs left) from 5.0% to 3.875% with no fees. I'm trying to figure out the lifetime savings.

I believe this change in interest rate comes out to an effective $200 monthly savings. Please correct me if I'm wrong.

I used a couple refinance online calculators (e.g. zillow) and say a lifetime savings of about $5000. But if I use mortgage calculators and look at the amortization schedule, it looks like the saving is large than that (e.g. total interest paid is app 270,000 v 201,000). And I would probably just put the $200 back on the mortgage.

The only think i can think of is that refinance calculators are taking into account the present value of the interest savings.

Am I missing something in my calculations? Why is there a difference between the interested paid via the amortization schedule versus total interest saving that a refinance calculator (such as zillow's or bankrate's) returns.

F

  • What exactly are you asking? How some unnamed internet mortgage calculators work? – JohnFx Jan 27 '15 at 14:35
  • As noted in the question I used Zillow's refinance calculator, another was at bankrate.com. – Frank Jan 27 '15 at 15:23
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The first thing is to took at the fees. Which you say are zero. So we can ignore them for now.

The second area to look at is the number of payments. Your payment is going down for two reasons:

  • the lower rate;
  • and the increase in the number of payments.

When you first got the 30 year mortgage you expected to make 360 monthly payments. Now four years later you still have to make 312. When you refinance back to a 30 year mortgage you will be back to making 360 payments. Those extra 48 payments make each payment lower, but make the total interest paid increase.

Now for some numbers:

26 years     5%  monthly:$1662.70  payments:$518,761.31  interest:$228,761.31
26 years 3.875%  monthly:$1476.42  payments:$460,643.19  interest:$170,643.19
30 Years 3.875%  monthly:$1363.69  payments:$490,927.52  interest:$200,927.52

You would save ~$58,000 if the rate dropped and the end date stayed the same. But you give ~30,000 back by changing the end date.

Now back to the fees. Will you pay points to get the lower rate? Do they roll what fees you would have had into the loan balance so the new loan is larger than the old loan?

  • Yes those are the numbers I was looking at, but where I'm confused is that 58k-30k = 28k (b/c longer term). But the refinance calculators are says 5k total saving. So trying to understand the diff between 28k and 5k. – Frank Jan 27 '15 at 14:44
  • @Frank - mhoran's answer lays out the calculations beautifully. Keep the remaining 26 years left, save $58K, go 30, save just $28K. We can guess why another site's calculator gave an odd answer, but what's the point? It's the correct answer we're all trying to give at this site. – JoeTaxpayer Feb 1 '15 at 13:54
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First I found a mortgage amortization schedule. I plugged in your numbers and figure to date, you have paid 56,252.57 in interest and still owe 271,950. If you kept things as is you would pay a total of 270,441.77. So the amount to compare the new loan to is what you will pay minus what you already paid: (270,441.77 - 56,252.57) = 214,189.20. I believe your current payment is 1556.78.

So doing the same thing with the new loan, I come up with a new payment of 1278.81, and a total interest paid of 188,421.51. This is a savings of 25,767.69.

If you keep your payment at 1556.78, that would be an extra 277.97 going to the mortgage, you see a lot of savings. The total interest payment would be 129138.37, a savings of 85,050.83.

One of the issues here is that you are essentially turning a 30 year loan into a 34 year loan. Can you do a 25 or 20 year? If you can swing about an extra 400 a month you can do a 15 year. Your interest rate would be lower, and you would pay only 72K in interest making your savings around 142K.

You were very correct in assuming the 5K was no where near the right figure.

  • 1
    But if he makes the same payments, the mortgage won't run 34 years, or even 26 years... – DJohnM Jan 27 '15 at 15:50
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One point often missed: adding together money paid at different points in time (especially over 30 years!) can be very misleading and result in unfortunate decisions.

The best method of choosing between two scenarios is to choose some single point in time, preferably today, and then compare the results of the two scenarios, changing as few parameters as possible. A mortgage calculator, especially one that allows the input of the final balance owing, is very helpful.

Today, you are 4 years into a 30 year, 5.000%, $290,000.00 mortgage. Assuming that the interest rates are compounded monthly, I calculate that your monthly payment is $1556.78, and that the current outstanding balance is $271,527.14 (Depressing how little those four years of payments have reduced the balance... But I digress)

Scenario #1 Continue with the current mortgage; pay $1556.78 monthly for 26 more years, and you are debt free at the end.

Scenario #2 Take out a loan today for 26 years at 3.8750%, with payments of $1556.78 a month for the 26 years (exactly the same cash flow as Scenario #1). You can borrow $305,784.30 for that payment schedule at that lower interest rate. Take the loan money, pay off the current balance on your 5.000% mortgage, and put the $34,247.16 difference in your pocket. The payments remain the same in both scenarios, the debt free date is the same, only the cash in your pocket, in one lump, today, is different.

So, is $34000+ enough incentive to pay off one mortgage and take out another?

As an example of how adding interest amounts is a bad metric: Suppose someone just lent you $1,000,000 for 15 years, at 1% a year, paying interest only each year until the end. You'd pay $150,000 in interest over the life of this loan. Now suppose someone offers to save you $50,000 by replacing this loan with $1,000,000 at 10.00% for 1 year. Good deal?

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