Mortgage refi advice needed

[Gold Metal Flake]

We are looking to refi to a lower rate. We will be financing about 130K. I intend to be aggressive about repaying it as I hate hate hate paying out all of that interest. So I am looking at two options:

15 year at 4.5% and a monthly payment of $975

10 year at 4.25% and a monthly payment of $1300

OK, we can do the $1300. Not easy, but we can do it. Now the question:

I know that the ratio of interest to principle is high at the start of a mortgage, so I am wondering if there would be an advantage to getting the 15 year and still making the $1300 payments so that I am paying more on the principle from the start. I guess I am asking if the ratio of interest to principle would be a little less on the 15 year so that if I increase my principle payment I could end up paying less in interest than if I get the 10 year and just make the minimum payment?

[Oregone]

1. Load them into an amoratization calculator and compare side by side

Most calcs allow you to provide extra payments.

Normally the shorter mortgage wins, but any difference in the interest you pay could be considered "insurance" for allowing you to drop to 975 if something happens

[Oregone]

4. Side by side I get a difference of $2300 in interest

Take the 15 year loan and make payments, and consider that amount an "insurance" premium


BUT, remember that RIFI resets your current amoratization table and many times rolls in the closing costs, which will be a few thousand dollars (about $5K)

You may be even better off just paying down more and stay with what you have after you figure in closing costs. Whatever closing costs you must pay could go towards a balloon payment on your current loan if you have the money (otherwise, if they are rolled in, they take far more to pay off and a side-by-side amoratization against your current loan may not make a REFI look too pleasant).

Im almost halfway through my 30 year from a purchase I made in 2003. I just can't win by refi-ing in the short term.

[rucky]

2. Run an amortization...

http://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

[flvegan]

3. I'd go for the 15 year, but make $1300/mo payments.

Hit that principal!

[RB TexLa]

5. 15 with the higher payment, you'll pay it off between 10 and 11 years

but if something happens you can drop to the regular payment to get through it.

[Travis_0004]

6. Heres the math I got

A 10 year mortgage made today would be payed off in March 2020. No difficult math there.

If you got the higher 15 year loan, but payed 1300 a month, due to higher interest you would pay the loan off in July 2020, so you would make 4 extra payments, or 4,200 dollars.

(July's payment would be about 300.00)

Is 4200 dollars, or 4 extra payments worth the flexibility to drop your monthly payments if the need arises. If you are pretty well off, or have some liquid assets you can easily sell off, then take the 10 year mortgage. If you may need that flexibility, take the 15 year mortgage.

Once you answer that question, you will have your answer (but please double check my math)

[Oregone]

7. The real thing to look at here is the cost of borrowing

Or the interest. The length of the term and number of payments aren't as important, and in this scenario, negligable in difference. That "extra" money they are paying isn't really extra if its going towards principal.

This is a good tool:
http://www.bankrate.com/calculators/mortgages/loan-calculator.aspx

What this person hasn't told us is what their current loan is, how much closing costs are and how much interest they will pay on the current loan if they made $1300 payments a month until it ended. Also, how long they intend to own the home (over 5 years?).

[Gold Metal Flake]

11. Okay, I tried the tool as well.

My current loan is a 20 year and the maturity date is 2/1/25. The interest rate is 5.875, monthly payment is 957.48 ans the remaining balance is 113968.16. My statement says that is 397.56 P and 559.92 I. I don't know how to figure the rest of the loan if I just paid 1300 towards it.

No points on the refi. I guess I'll be out here a while which is why I am considering this.

The 1300 on the 15 year ends up being 2332 more than the 10 year but as RG noted above I would have the option if dropping to the minimum payment if I have a need to.

[abbeyco]

14. You're exactly right!

I went through the same thing with my refi last year and it's much better to lock in the longer term but pay it at the level of the shorter term. In the event you need some funds for some sort of emergency, then make the regular payment until you can bump back up to the higher level. You won't blow your credit or jeopardize your home if something happens.

Good luck!

[Liberal In Texas]

8. We're re-fi-ing right now.

And were wondering about the longer as opposed to shorter term. The thing about the longer term is you can take that extra $325 you would have been paying on the shorter term and apply it to principle. IF AT SOME TIME you can't do it, you are only obligated to the $975.

Obviously you have to be dedicated to making extra principle payments every month and not blow it on a boat or something.

[Oregone]

9. The difference is negligible, but the shorter term should always win at the end of the day

That doesn't make it the better option.

And depending on where you are in your current loan, the interest rate, and the closing costs, it doesn't make a low interest refi the better option either at all.

Each case is unique

[Liberal In Texas]

10. True. For us even with the costs rolled in, we'll be saving over $200 bucks a month.

We plan on taking the extra money and more to apply to principle.

Plus, we also had one of those 80/20 deals (for reasons too long to explain) we want to get away from.

[Telly Savalas]

12. The higher the interest rate, the more interest accrues each month.

and thus the more you're spending on interest over the life of the loan and thus the more each $1300 payment goes towards interest. So your initial $1300 payments are paying less in principal on the 4.5% loan than on the 4.25% loan.

The only advantage to taking the higher interest, longer term loan is that if you get in a jam and the $1300 becomes overly burdensome you can always revert to paying only the $975. Having this safety net may be worth a quarter point of interest to you though.

[msongs]

13. u can add extra to the monthly payment and dedicate it to prinicpal only nt

[gmoney]

15. Go for 15 year

Make payments like you're going to pay it in 10, but if things get rough (job loss, unexpected expenses), you'll have a more manageable payment to deal with.

And at 4.5%, you could conceivably take that $325 a month and just invest it and probably beat that return over the course of 15 years and end up money ahead.

[jotsy]

16. I had a math teacher who suggested that just one extra payment per year

throws their math formulas off and shortens the life of the loan because that's a payment that's entirely principle and the interest figure is drawn from is smaller than the bank anticipates. It was way back and when, so maybe some rules have changed, good luck.

[ScreamingMeemie]

17. And you are right.

One extra payment a year is all it takes to knock 7 years off a fixed 30 and about 3.5-5 on a 15.

[jotsy]

18. I'm good at correct, right is kind of scary these days!