My bank now offers lower interest rates than what I got when I first started my mortgage. I called to see about changing my terms (lower rate, same payoff date), and they said it would actually increase my payments slightly. My mortgage details are as follows:
- Principle (p): $175,000
- Acquired loan in: 2012
- Term: 20-year, bi-weekly (26 payments per year = <20-year pay off schedule)
- Payoff date: 2030 (14 years left)
- Current interest rate (i): 3.4%
- New interest rate (i'): 2.6%
- The new loan would have the exact same payoff date, the same principle, and no points. The only added expense is a $950 fee upfront to change the interest rate.
I wasn't clear on their explanation of why my payments would go up, but it had something to do with restarting the interest payments. I understand that when you take out a loan, you pay mostly interest and little principal in the beginning and then mostly principal at the end due to the amortization schedule. My understanding, which I guess is wrong, was that the amortization schedule works by setting your payment such that your first payment is just a little higher than the amount of interest you accumulated that period, e.g. a $100 loan with a 1% monthly rate, you've got $1 in interest after the first month, so your first payment could be $1.20 with only $0.20 going towards the principal. Your $1.20 monthly payment will be almost all principal when the loan gets down to $5.
In my situation, this would mean that my next bi-weekly payment will be about $230 towards interest and the rest towards the principle.
p * i / 26 bi-weekly payments per year= $228.85
If my rate drops to 2.6%, I would pay $175 towards the interest and the rest towards the principle.
p * i' / 26 bi-weekly payments per year = $175.00$$
My new monthly payment would have to be such that the amount of principal I pay off each month would be small enough that I would still have the same payoff date, so I would expect my payments to go down. I must be missing something since the bank said the payments would go up slightly. Does what the bank said make sense?
Update Turns out the bank made a mistake when they quoted me the payments the first time. After pursuing this further, as was suggested, the bank revised their payments to be ~$30 less than I pay now (current p+i = $613.12, new p+i = $585.98 at a rate of 2.55%). At 26 payments per year, I save ~$700 per year and about $9,000 over the life of the loan (after a $950 rate reduction fee).