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I just got an e-mail for our mortgage broker saying that rates have dropped a bit since we closed on our house about a year ago, and offering to refinance our mortgage (i.e., remortgage) with no cost to us. Here’s how it would work…
The 30-year fixed par rate (i.e., the rate without paying points) is currently 5.875%. If we take the higher rate (6.125%) we’d get -0.75 points which would offset the closing costs. Nothing additional would be rolled into the mortgage balance; we would simply refinance the existing balance into a new mortgage. We would, of course, have to bring additional escrow funds to the closing table, but we’d then get a refund of our escrow account from our existing mortgage, so that would be a push.
The bottom line here is that we can shave 0.25% off our mortgage rate for free. The only downside is that we’d be resetting the mortgage ‘clock’ to a full 30 years. However, we’re currently only about 9 months in). It’s a no-brainer, right?
Deciding When to Refinance
First off, note that I’m ignoring taxes and insurance for the sake of simplicity — those values will be the same under either scenario.
For starters, our original mortgage balance was $175k. At 6.375% over 30 years, that works out to $1092/month ($393, 120 over the life of the loan). However, we’ve been paying an additional $150/month toward principal. Assuming that we continue this for the life of the loan, we’ll pay it off about eight years early for a grand total of $323, 665 (a savings of $69, 455).
If we were to go ahead with the refinance, we’d be rolling our current balance ($172, 136) into a new mortgage at 6.125%. Over 30 years this works out to $1046/month, or a total of $376, 560. Assuming that we keep our payments the same, however, we’ll be overpaying by $196/month ($150 + the $46/month savings from the refi), that figure drops to $299, 836, a savings of $76, 724. However, we’ve already paid nine months into our current mortgage, so we can’t neglect that in our total cost figures. Nine months at $1, 092 + $150 = $11, 178. Thus, we’re looking at a total cost of $299, 836 + $11, 178 = $311, 014.
Comparing the two scenarios reveals that we’ll come out about $12.5k ahead if we opt for the no-cost refinance. Of course, these sorts of calculations are only as good as your assumptions, but these scenarios are as realistic as I can make them. You can also try plugging numbers into a refinance calculator to see where you come out.