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Refinancing Mortgage Question (first post)
Old 07-12-2007, 02:31 PM   #1
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Refinancing Mortgage Question (first post)

Hi--I have been lurking here for about a year now--I always enjoy dropping by and seeing what folks here have to say. Based on what I have seen, I figured I might get some help with my question....so, here goes.

I currently have a mortgage balance of about $84,000. My rate is 5.25%, and I have been paying extra principal each month (a bit over $1000 extra). If I continue on this path, I will have the house paid off in 34 months. If it matters the house is probably worth $270,000 and I have no other debt, and I am maxing out my 401-k. It occured to me that I could dramatically increase my cash flow, and potentially be able to leverage the money the bank is lending me, by refinaincing my mortgage to a 30-year fixed rate. A back of the envelope calculation would make my payment about $521/month (P&I only on a mortgage of $84,000). My current P&I payment (including the extra principal) is $2673. So, it would appear I could free up about $2100 per month. Over a 30 year period, I figure I could conservatively make 8% on my money---hopefully more. I have always wanted to be debt free, and paying off the house would feel great, but am now wondering if I would be better off extending the term of my mortgage. Any help/recomendations would be appreciated. Thanks!
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Old 07-12-2007, 02:39 PM   #2
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Does your assumption use 5.25% as the refi- rate?

I assume it'd be at least a percent higher. Your 34 mo. payoff time seems pretty short. Are you sure this is right?

Something seems odd about your comparison of 2673 for 34 mos. vs. 2100/mo. for 30 years.

I'll let others chime in that can communicate more clearly than I can.

-CC
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Old 07-12-2007, 02:44 PM   #3
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Quote:
Originally Posted by CCdaCE View Post
Does your assumption use 5.25% as the refi- rate?

I assume it'd be at least a percent higher. Your 34 mo. payoff time seems pretty short. Are you sure this is right?

Something seems odd about your comparison of 2673 for 34 mos. vs. 2100/mo. for 30 years.

I'll let others chime in that can communicate more clearly than I can.

-CC

The refi rate I used was 6.30% (from Bankrate.com). The 34 month payoff period is, I believe is correct. Your point is well taken about the $2100/month for 30 years---if I stayed on my current path, I would not have a mortgage payment at all after 34 months I guess what I really would be gaining is $2100/month for 34 months.
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Old 07-12-2007, 03:14 PM   #4
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You are so close, that I would probably just pay it off and be done with it.
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Old 07-12-2007, 03:45 PM   #5
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Re-financing is a bad idea. Did you include closing costs in that calculation? In my area you have to pay a couple grand of closing costs just for taxes and paperwork, and a re-fi on a small mortgage almost never makes sense.

You can free up $1000 in cash flow just by stopping the extra payments. So why not just do that and keep your lower rate and all the closing costs?
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Old 07-12-2007, 03:51 PM   #6
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Pay it off. Then start socking away as much as you can.
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Old 07-12-2007, 03:58 PM   #7
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Another option is to reduce your prepayment rate.

This could free up $1000/month for investments now and you could still leverage the cheap loan without having to pay closing costs.

I definitely wouldn't refinance.
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Old 07-12-2007, 03:58 PM   #8
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Don't do it. You are so close!!!!!!!!!!!!!!!!

Finish the 34 months and your cash flow will impove with no mortgage payment. If you really want to get more in the market right now use the $1,000 a month you are paying extra.
You have a great rate no reason to move from 5.25% to 6.30% plus whatever costs they hit you with. If you go with the refi your right you could probably get 8% and beat the spread but you might get minus 20% couldn't feel good about that.
I have a hard time right before during and after I hit financial targets, just can't wait to get the next step going. I just have to talk myself off the ledge and stick to the plan. You have a good plan just ride it out. Great job so far!!!!!!!!!!!!
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Old 07-12-2007, 04:04 PM   #9
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When I look at bankrate you can get 6.25%, but you need to pay about $5k of closing costs. Only worthwhile if you really need the money.

Assuming you can make use of the tax deduction I wouldn't pay it off early either. You can get a guaranteed rate better than 5.25% or make risky investments that you expect to do better, and have the flexibility to pay the mortgage off at any time.
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Old 07-17-2007, 12:29 PM   #10
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You will end up WAY AHEAd paying off the mortage in about 3 years. You'll have plenty of time to invest.

Starting a new 30 year mortgage lowers your payment, by starting a NEW 360 month payment cycle........

Why do that? No debt, and you'll have a LOT to invest each month..........
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Old 07-17-2007, 12:58 PM   #11
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Quote:
Originally Posted by stephenandrew View Post
Hi--I have been lurking here for about a year now--I always enjoy dropping by and seeing what folks here have to say. Based on what I have seen, I figured I might get some help with my question....so, here goes.

I currently have a mortgage balance of about $84,000. My rate is 5.25%, and I have been paying extra principal each month (a bit over $1000 extra). If I continue on this path, I will have the house paid off in 34 months. If it matters the house is probably worth $270,000 and I have no other debt, and I am maxing out my 401-k. It occured to me that I could dramatically increase my cash flow, and potentially be able to leverage the money the bank is lending me, by refinaincing my mortgage to a 30-year fixed rate. A back of the envelope calculation would make my payment about $521/month (P&I only on a mortgage of $84,000). My current P&I payment (including the extra principal) is $2673. So, it would appear I could free up about $2100 per month. Over a 30 year period, I figure I could conservatively make 8% on my money---hopefully more. I have always wanted to be debt free, and paying off the house would feel great, but am now wondering if I would be better off extending the term of my mortgage. Any help/recomendations would be appreciated. Thanks!
I would compare interest paid under both situations

34 months of interest vs 360 months of interest.
I would look at expected returns for 360-34=326 months of investing the current payment of $3673.

IMO you would come out ahead paying off in 34 mos, then investing the payment and over payment with less risk. The overall return might be higher using other methods... but you have been going down this path for so long, it makes sense to me to finish what you started, cut the debt out of the picture and move on financially with less risk.

You may come out further ahead with less risk by investing the over payment now ($1000/mo for 34 months). Then paying off mortgage on current schedule, then investing the $2673 once mortgage is paid off.
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Old 07-17-2007, 05:06 PM   #12
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I dont get this....you are paying down a mortgage and now want to take out another mortgage at a higher rate to get the equity out.....

I have a smaller mortgage to this and frankly, why are you paying it down to begin with....I think another idea is to pay the regular payment on time and take as much of a tax advantage (and sock the extra money into a taxable investment or even cash at current rates) and when you no longer have the tax advantage, pay it down with a lump sum, which is my plan...
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