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Extra principal payments vs refinancing.

My existing mortgage:  5.875%, 23.5 years remaining of a 30 yr fixed loan.  The remaining amt: 205k.  Would it be better to refinance at 4.875 for 20 yr fixed or make additional principal payments/mos on my existing mortgage.

  • February 16 2009 - Charlotte
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Answers (3)

You might want to consider refinancing to another 30 year loan. Often 20 year rates are the same as 30 year rates. If you go with a 30 year you can always pre-pay but if you go with a 20 or 15 year you can't pay less if there is a job loss or some other unforseen financial difficulty. Also, keep in mind that if you refi into the high 4s or low 5s your after tax interest rate would be in the mid 3s (assuming a 33% state and federal combined tax bracket). Before you pre-pay your mortgage (and effectively get a 3.5% rate of return on your money) you may want to make sure you have the following financial milestones achieved: 3-6 months cash reserves, all non tax deductible debt paid off (credit cards etc.), proper life and disability coverage, college ed funded if you have kids and retirment plans fully funded. Many folks tackle their mortgage pre-payment (at a very low rate of return with no liquidity) before they have these financial essentials covered.
  • February 17 2009
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if you can handle the payment, consider a 15 year loan. You will get a better rate drop going to 15 years, and you mentioned paying extra principal above.
  • February 16 2009
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Profile picture for SoCal Engr
I'm not a pro (meaning check my numbers), but I tried to run your numbers through Excel using the PPMT() and IPMT() functions. You didn't say what your original loan amount was, but I backfit about $236,250 based on $205K remaining after 6.5 years.

At 5.875% over 6.5 years, your current loan has cost you about $142.5K in principal and interest payments. P/I on 20yrs @ 4.875% will cost you another $321.3K, with a monthly P/I of $1,339. Figuring about $4K for refi costs, the total cost comes to about $468K (prior 6.5 yrs, 20yrs @ 4.875 on 204K, plus refi costs).

Under your current loan @ 5.875%, I am showing you at about $1,397/mth for P/I. You would need to start paying an additional $170/mth to get the total costs on this loan to match the refi option. The additional principal amounts to about $43.8K, which is added into the total cost of the loan. BTW, the projection is that the horizon at this schedule would be about 19 years.

Given the above, the refi is the better option. To get close to the total outlay and horizon using the current 30yr @ 5.875% your P/I payments would need to jump to $1,567, where refi actually drops from your current payment by $58 (assuming you don't roll costs into loan). If you added this back into the refi (i.e., kept your monthly at $1,397), you could cut the horizon on the refi down to 19 yrs and save some additional interest.
  • February 16 2009
  • 2Yes

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