Should i keep paying off my Mortgage or should i refi.?
by Mortgage Rates on Wednesday, September 22nd, 2010 | 3 Comments
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Get a 15 year Fixed
Banks are still pushing ARMs and variable rates – don’t get conned.
Google
Should I re-finance my house calculator”
Do about 3 of these calculators
If you can get at least 1 1/2 to 2% lower rate – then it is worth all the closing costs.
Also if you know you will stay in the home 5 to 7 years – at least.
Sounds like you might be better off just making payments towards principal.
Before you do this make absolute sure you have at least 6 months worth of living expenses in a savings account – liquid cash.
And make sure your cars and other debt are all paid off first.
Do you have kids going to college?
“Hiding” money in a home, 401K’s, IRA’s, and ROTH’s, are a great way to look good in the FAFSA.
The least amount of cash available you have, the greater the chances for grants and scholarships based on need.
The FAFSA does not look at your hidden assetts – just your taxable money.
Google Estimated Family Contribution calculator – you’ll see.
Even if you don’t have cash to pay for college – those student loans are sweet.
You don’t have to pay them until your kids graduate from college and the interest rates are super low.
There are seminars that will charge you thousands of dollars for this info.
529′s are really one of the worst investments you can make.
Since 25% a year will be considered income towards college.
Plus, those plans carry some pretty nasty fees.
Hide your money – and hide it well – and get those grants and cheap loans.
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I agree with Judy. Re-fi at 15 years and get an even lower interest rate and feel free to make extra payments on that loan too. Maybe have it paid off in 8 years with the same payments you’re making now.
If you told us how much your loan is, we could give you some more specific answers, but this information should be helpful in general terms.
You should definitely consider getting a 15-year fixed rate loan instead. Since you are already paying enough on your existing mortgage to retire the debt in 9 years, your new payment on a 15 year mortgage would still be less than what you’re paying now.
In fact, after getting a new 15 year mortgage, I would encourage you to keep making the same total payment on the new mortgage that you are spending on your existing mortgage. If you do that you’ll pay off your mortgage even faster because you’re spending even less money on interest, so more of your money is paying down the principal each month.
Ok, so if you refinance your monthly payment will definitely be lower, but the *total* amount of interest you’ll pay over 30 years will probably be more than what you’ll pay on your existing mortgage over the next 20 years — and it is certainly more than what you would pay on your existing mortgage if you pay it off in 9 years as you’re planning to do.
With this in mind, how does it make sense to get a new mortgage? Because you either 1) need a lower monthly payment, or 2) (like in your case) you plan to pay off the new mortgage in less than its full term.
Since you didn’t tell us how much your existing loan is, I’ll do some calculations using a loan balance of $100,000. There are a ton of useful calculators at Bankrate.com.
I’m going to assume your existing interest rate is actually 5.875, since that is much more common than a rate of 5.85.
If your balance is $100,000 with a rate of 5.875% with 20 years remaining, your current monthly payment would be $709.24. In twenty years the total interest you’ll payment would total $70,217.23. Since you are paying your existing loan off in 9 years, you would (in our example) be paying $1194.40 each month. The great news about this (in addition to paying off your loan 11 years early) is that you are only going to spend $28,995.51 in total interest on your existing loan instead of the more than $70k you’d pay over 20 years.
Now, lets assume that you can get a new 30-year mortgage at the rate you mentioned, 4.5%.
The good news about this loan is that the monthly payment is reduced to only $506.69 per month. The bad news is that the total amount of interest that will be paid over the 30-year life of the loan is $82,406.71 – more than $12,000 more than you would spend on your existing loan. The trade off is that you get an extra 10 years to pay them that extra $12,000 in interest.
The better news is that nothing in the previous paragraph is really important to you, because you want to keep paying off your loan at a faster rate than the term of the contract — so you’re actually going to end up spending less money in interest to pay off your loan at a faster rate. Here’s how:
If you want to keep your goal of paying off your new loan in nine years (just as you are doing with your existing loan), then you’ll continue to pay extra each month, sending in a total of $1127.76 each month – a savings of about $67 each month over your current (presumed) payment. The total interest that you will spend on paying the loan this way will be $21, 798.00
If you’re willing to keep making the same payment you are now on your *new* loan, then you’ll still send in $1194.40 each month. You won’t save any money each month, but you’ll make your last payment 7 months early, after 8 years, 5 months — and your total interest paid on the loan will be $20,247.28. This would be a savings of more than $8750 in interest over your existing (presumed) loan of $100,000.
Basically, as long as you still plan keep paying off your new loan at a rate similar to your existing loan, you just need to decide if the money that you would spend on closing costs *now* will be worth the longer term savings in interest. Keep in mind that your new mortgage *must* allow you to make additional payments to principal without penalty for this to work. Fortunately, almost all fixed rate mortgages have no penalty for pre-payments. Most states require fixed-rate mortgages to have no pre-payment penalty, but I’m told that there are exceptions.
In short, the larger the amount you’re going to re-finance, the greater your savings will be – but shop around for the best mix of interest rate and closing costs. There can be very wide variations of closing costs between lenders, even for the exact same rate.