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refinance puzzle
Old 01-04-2008, 04:08 PM   #1
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refinance puzzle

I know you guys always give me wise advice.

what's the way to analyze refinance?

here is the case
Current mortgage: 530k with 30fixed 6.5% 355 months left.
new deal: 530k with 30fixed biweek 5.75% 360 months left. Cost is around 5k

Current mortgage, monthly pay 3362
new deal , monthly pay 3349

So two deal has same cash flow, only new deal pay extra 3093 to equity per year.

Then my breakeven is 5000/3093= 1.6 years.

Do I understand it correctly? Good deal or not?
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Old 01-04-2008, 05:00 PM   #2
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Your number are fishy... so somehting is wrong in what you say...

You save a whopping $13 per month per your post...

SO, $5,000/$13 = 385 months breakeven... or... never since it is only 360 months loan...

AND... BTW, your other one has 5 more payments at 3362 or another $16,810...

So, tell us the real numbers or don't do it..

Just noticed... biweekly.... OHHH... so not 360 months?
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Old 01-04-2008, 05:22 PM   #3
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Quote:
Originally Posted by semtex View Post
I know you guys always give me wise advice.

what's the way to analyze refinance?

here is the case
Current mortgage: 530k with 30fixed 6.5% 355 months left.
new deal: 530k with 30fixed biweek 5.75% 360 months left. Cost is around 5k

Current mortgage, monthly pay 3362
new deal , monthly pay 3349

So two deal has same cash flow, only new deal pay extra 3093 to equity per year.

Then my breakeven is 5000/3093= 1.6 years.

Do I understand it correctly? Good deal or not?

Sounds good to me..... $530,000 @ 6.5 for 360 months = $3362 per month and will cost you $682,264 in total interest.

Under the new scenario $530,000 @ 5.75 will cost you $583,454 in total interest over 360 months,a savings of almost $100,000.

New mortgage $3093 p/i + $256 addtional principal=$3349

Just by paying that extra $256 will shorten your mortgage by over 5 years and give you a total interest payment of $464,939 vs $682,264.That will save you over $200,000 interest,if you compare it to your current mortgage.The fact that it is a bi-weekly will save you a little more,just make sure they aren't charging you for it.If the are,you may be better off just refinancing and making the additional $256 principal payment each month.

That's my 2 cents,Kevin
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Old 01-04-2008, 09:28 PM   #4
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I also think something is wrong. The lower rate mortgage with longer payoff time should have a more noticeably lower monthly(?) payment. I assume those monthly numbers are withou biweekly payments. I'm not sure if you are converting biweekly into monthly values in the description, so maybe that would make a difference. Seems like the lower rate is not really lower for some reason. Or they are adding some loan costs onto the principal of the new loan. Or they are adding some biweekly fee into the whole thing.

Seems like you'd be better off making extra payments on the old loan instead of paying $5k for what looks to be essentially the same loan.

Dan
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Old 01-04-2008, 10:45 PM   #5
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Quote:
Originally Posted by semtex View Post
I know you guys always give me wise advice.

what's the way to analyze refinance?

here is the case
Current mortgage: 530k with 30fixed 6.5% 355 months left.
new deal: 530k with 30fixed biweek 5.75% 360 months left. Cost is around 5k

Current mortgage, monthly pay 3362
new deal , monthly pay 3349

So two deal has same cash flow, only new deal pay extra 3093 to equity per year.

Then my breakeven is 5000/3093= 1.6 years.

Do I understand it correctly? Good deal or not?
I personally wouldn't do it. Either just put an extra $257/month towards the current mortgage, or once a year send an extra principle payment of $3,093.
2 things to not forget:
  • that with a bi-weekly mortgage, the (possibly) 2 "extra" paychecks a year will disappear to be put towards the mortgage (which can, but doesn't always, break a budget eventually).
  • you'll be forced to pay the extra 2 payments/year even if you don't want to. And that may be the time when you need it for vehicle repair, etc.
Now if you have a decent amount of savings to back you up, then possibly, but your break-even payment isn't 1.6 years out. Don't forget that you've extended the mortgage and additional 5 months, so it'll be at least 2 years before the break-even point. And as someone else mentioned, if they are charging you a monthly fee for the bi-weekly portion, it will be even longer than 2 years.
As a matter of preference, we've only refinanced if we're going to a shorter term mortgage AND/OR considerably lower rate for a small fee.
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Old 01-05-2008, 12:49 AM   #6
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I think that is a worth while to refinance .75% is fairly hefty decrease in interest saving you just under $4K a year initially. Now after taxes your actually savings will probably be in the $2500-$3000 a year and decreasing over time. Compared to a $5K in fees your break even period is perhaps a bit longer that 1.6 years but not huge.

My crystal ball on mortgages is rather fuzzy, but I don't see any reason that mortgage for folks with very good credit should increase, so I wouldn't jump through hoops to get that mortgage.
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Old 01-05-2008, 06:26 AM   #7
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Those numbers don't make sense. Why don't you just make an extra principal payment instead?
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Old 01-05-2008, 06:47 AM   #8
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Man that mortgage is a biggie. How much do you make a year, If I may ask?
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Old 01-05-2008, 08:49 AM   #9
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If you factor in your savings over the life of the loan a refi is a no brainer in my opinion.

Just for the moment forget about the biweekly payment..........If you can refi at 5.75 % for 30 years,that'll give you a principal and interest payment of $3093 per month vs $3362,which is your current payment at 6.5%.Take the $269 that you will save in interest and apply it towards your principal each month $3093 + $269=$3362.If you do that,your home will be paid off in 24 1/2 years vs 30 and you will save $215,666 interest over the life of the loan.The bi-weekly payments should shorten it even more.

From your initial post I get the impression that you would like to pay off this home sooner rather than later.

Good luck figuring it all out,Kevin
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Old 01-05-2008, 01:41 PM   #10
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Is there some apples-oranges going on here? As others said - the numbers do not make sense.

Does Bi-weekly mean 26 payments a year? (52 weeks / 2)?

I suspect you didn't convert bi-weekly to monthly correctly.

-ERD50
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Old 01-07-2008, 07:35 AM   #11
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Quote:
Originally Posted by clifp View Post
I think that is a worth while to refinance .75% is fairly hefty decrease in interest saving you just under $4K a year initially. Now after taxes your actually savings will probably be in the $2500-$3000 a year and decreasing over time. Compared to a $5K in fees your break even period is perhaps a bit longer that 1.6 years but not huge.

My crystal ball on mortgages is rather fuzzy, but I don't see any reason that mortgage for folks with very good credit should increase, so I wouldn't jump through hoops to get that mortgage.
Yep, that crystal ball is pretty fuzzy.
Let's see, what's $5,000/$530,000? .00943 (rounded up), which would be .94%
They think they're saving .75%, but in reality they're paying an additional .94%-.75% = .19% .
The reason that the payments are slightly lower, is merely because the loan is re-extended by 5 months (or so).
That's why I was suggesting a shorter term mortgage. If you plan on refinancing (unless there is $0 cost refinance available to you ... which some institutions do this), it's usually best to refinance to a shorter term.
Of course, this also depends upon their ability to pay the higher payment.

We did 2 refinances for our mortgage. The original one was a 30 year @ 8%, we refinanced to another 30 year mortgage @ 6.25% (fee of $4,500), and after a couple years we refinanced again to a 15 year @ 5.5% (now only 12.5 years left and it had a fee of $3,000). Needless to say, as long as we don't have any problems, we won't be refinancing our mortgage again.
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Old 01-07-2008, 08:11 AM   #12
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Running a simple amortization results this:
$530k @ 6.5% = $3,349.96
$530k @ 5.5% = $3,092.94.
However, bi-weekly payments will throw that up by $515.49/month more (since there are 2 additional payments), so that would mean the monthly payment would be $3,608.43, although this calculation can possibly be wrong (because I did a regular 30 year mortgage to get the payment and added 2 of those payments every year). So the real payment would probably be somewhere around $3,608.43, not $3,349.

Update: I just found a simple online web based calculator here (Mortgage Calculators - Bi-weekly mortgage calculator)
It shows that the bi-weekly payment would be $1,504.64, which equates to $3,260.05/month.
Which goes back to what some other folks were stating. There must be additional costs for the bi-weekly program if the number you have is $3,349.
Come to think of it, why is the current mortgage payment $3,362? It should be $3,349 if it is traditional fixed rate mortgage.
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Old 01-08-2008, 11:01 AM   #13
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Quote:
Originally Posted by semtex View Post
I know you guys always give me wise advice.

what's the way to analyze refinance?

here is the case
Current mortgage: 530k with 30fixed 6.5% 355 months left.
new deal: 530k with 30fixed biweek 5.75% 360 months left. Cost is around 5k

Current mortgage, monthly pay 3362
new deal , monthly pay 3349

So two deal has same cash flow, only new deal pay extra 3093 to equity per year.

Then my breakeven is 5000/3093= 1.6 years.

Do I understand it correctly? Good deal or not?
Microsoft has an excel ammortization schedule you can download to play with numbers. I downloaded the sheet then create a copy and put both side by side so I could sum columns and see a timeline of when things get paid off.

The break even is good to know, a better analysis would be
a) payoff dates
b) interest paid
c) what you would do with extra payment now (invest or payoff)
d) what you would do with payment once mortgage is paid off

I might suggest keeping 5.75% as 30 yr fixed with monthly payments, then investing the 2 extra payments per year. I think most balanced funds would generate a 5.75% return without much effort or risk.

My mortgage is 5.75% and I am NOT paying it down early. I am investing the extra payments into PRPFX.
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Old 01-08-2008, 03:33 PM   #14
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Sorry guys, too much happened. Our company is shaking out people. Do not have time to visit here.

Clarify some details:

Current mortgage: 530k with 30fixed 6.5% 355 months left. 3362/month
new deal: 530k with 30fixed biweek 5.75% 360 months left. Cost is around 5k

new deal The monthly is $ 3092.94, but it is biweek loan, so I have to pay 26/year. It becomes (3093/2)*26/12=3349 per month.

We could assume same cash flow3362/3349. But second one need pay 5k cost upfront, but 3092 extra will flow into equity each year.

So 5000/3092=1.62 to break even.
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Old 01-08-2008, 03:38 PM   #15
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5.75% 30fixed biweek is the best rate I could get now. Normal 30fixed is 5.875%. My loan, >417k, is jumbo.
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