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September 23, 2009

Should I Refinance? 4.375% w/ 1 point v. 4.75%

After discussing our plan to pay down the mortgage, discussing my families accelerated mortgage amortization schedule, and things to consider before you refinance, I am now finally ready to run a simulation on whether or not to refinance!

What Refinance should I take? After looking at my current lender’s website, I narrowed the following two options as rates to consider: 15 year fixed @ 4.375% with one point and a 4.75% with zero points.

4.375% with 1 point vs. 4.75% Comparison-As noted before, points or “discount points” are essentially prepaid interest paid by the borrower to the lender at closing.  In my case I would pay $903 ($90,345 balance multiplied by 1%) upfront at closing if I choose the 4.375% with 1 point.  When I use Bankrate’s Mortgages calculator for the two options I will came up with the following numbers:

Full 15 year refi comparison 09-22-09

I will pay $36,147 at 4.75% compared to just $33,023 at 4.375% and with the $903 points paid up front a total of $33,926.  That’s a before tax savings of $2,220.  After looking at the schedules however it will take 34 months before 4.375% becomes profitable.

Paying extra-However as noted before, we are not planning on keeping the mortgage for 15 years as we are making significant extra principal payments each month.  How do you calculate which mortgage is better in that situation?  What if we continued paying the same amount we are paying a month at our current rate (6.1%)?  We are currently paying $2,218.10 a month in principal and interest (Taxes and Insurance excluded for convenience).  I ran the simulation on both rates and came up with the following:

Refinance 4.375%

Refinance 4.75%

Some interesting things came up.  First I found it interesting that both notes would actually end up being paid off in the same month, June 2013.  And second you would actually come out ahead by going with the 4.75% refinance!  The breakdown:

Agrresive refi comparison 09-22-09

It is amazing that the lower interest rate never comes out ahead under the scenario because of the prepaid interest points and the fact that huge payments are lowering the interest each month.

After doing this comparison I pretty much ruled out the 4.375% with one point refinance. I do not know if we can keep our aggressive monthly payment when we have children. I also do not know if we will be staying in the condo for more then 34 months. So right now any refinance would be at the 4.75% with no points. Tomorrow I will do the ultimate simulation: Should I refinance or not?


1 Comment »

  1. […] Should I Refinance? Part II-The Final decesion Filed under: Excel fun, Mortgage, Personal Finance, Real Example, Simulation — Tags: closings cost, Freddie mac, Mortgage, Refi, refinance — thebalancedspreadsheet @ 8:03 am I would like to wrap up today my series of posts on refinancing with the decision on whether or not to refinance my $90,435 6.1% mortgage. You first might want to first ready my thoughts on why we are paying our mortgage down quickly, why to refinance and the reasoning behind refinancing with a 15 year 4.75% fixed loan. […]

    Pingback by Should I Refinance? Part II-The Final decesion « Thebalancedspreadsheet's Blog — September 24, 2009 @ 8:09 am

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