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April 3, 2010

Refinance Breakeven Spreadsheet

Filed under: Excel fun, Mortgage — Tags: , , , — thebalancedspreadsheet @ 8:55 am

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On the heels of releasing the mortgage amortization schedule, I thought it would be nice to follow that up with a refinance breakeven calculator.  With mortgage interest rates at 40 year lows most people are rushing to refinance before rates rise again.  There are several things to consider before you refinance and this spreadsheet will help determine two of them. 1.) How much interest you will save if you refinance and 2.) How long it will take you to recoup your closing costs.   All you need to do is input 6 numbers:

Refinance Breakeven calculator

1.)    Current Loan balance-In cell B1 input your current loan balance.  Note that this is your current balance not the original amount you paid for the house but rather how much is owed currently.

2.)    Current Interest rate-In cell B2 enter your current interest rate.  Enter as a percentage (IE 5.5% interest rate would be 5.5 not .055)

3.)    Current Payment-In cell B3 enter your current principal and interest payment per month only, not taxes or insurance.

4.)    Refinance Rate-In cell E1 enter your refinanced rate the same way you entered in your current interest rate in cell B2.

5.)    Length of New Loan-In cell E2 enter the length in years of your new loan.  If doing partial years divide the partial year’s months by 12 and enter that number in as a decimal. For example, a 17 years and 3 month amortization you would enter 17.25 (17 years and (3 months/12)).

6.)    Refinance Costs-In cell E4 enter the total refinance cost.

Notes: After entering all six figures cells B16 and E6 will give you your results.  B16 is the total interest savings over the entire length of the refinance and E16 is the number of months it will take until your interest saved is greater than your closing costs.  Also note that all these savings are pre-tax.  Like the mortgage amortization schedule you can plug-in extra principle payments in the ‘Current’ and “Refi’ tabs if you choose to determine how much faster they will help pay off your mortgage.

The most important number is the months to breakeven figure.  As mentioned before when we were considering a refinance, if you do not think you will be in the house after the breakeven point, refinancing will actually cost you more in the long run.

You can find this and other helpful spreadsheets that I have created and shared on the spreadsheet page.  So please come back soon as that page will be continually updated.

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March 16, 2010

Equity Acceleration Programs: Not needed to pay off your mortgage sooner

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From time to time, when I get my mortgage statement in the mail, attached is a pamphlet encouraging me to enroll in the Equity Accelerator Program.  It is a service provided by the bank that automatically drafts half of your mortgage payment out of your bank account every two weeks and will help cut down the length of your mortgage.  In theory it sounds good, but is it really worth it?

How it works is very simple.  Every two weeks half a mortgage payment is withdrawn from your account.  So that means that 26 half payments are withdrawn each year.  Those 26 half payments equal 13 full payments, so you are paying the equivalent of an extra payment over a full year.  Over the length of a 30 year mortgage making one additional payment per year will reduce the mortgage anywhere between four and six years and save several thousands of dollars in interest.

While that does sounds nice there are some drawbacks, being mostly the fees associated with the service.  The program offered by my mortgage holder costs $9 a month to use plus a $49 start up fee.  The estimate provided to me by my mortgage holder is that it would take 12 years 9 months to finish paying off the balance if using their program, which would cost $1,426 ($49+$9 times 153 months) in fees.  The good news is that you can pay extra on your mortgage yourself without any fees!  Simply just make an extra mortgage payment a year on your own and the pay down time will be just the same as if you used the bank—less paying them to do it for you.

So while this is a nice service provided by the bank that will get you out of debt faster, the service is simply not worth it to me.  The fees are high for something you can do by yourself.  The $49 start up fee is a lot lower then it used to be though as previous offers included a $400-$500 start up fee!  But by simply being disciplined in creating and sticking to a budget you can pay down your mortgage faster by yourself.  I have a created a mortgage amortization spreadsheet that will track how soon your mortgage will be paid off if you make additional payments at any point in time in your mortgage.  My wife and I are using our own accelerated mortgage plan and are scheduled to have our mortgage paid off in just over 3 years!  Bottom line is that you do not have to pay the bank extra to pay down your mortgage, just do it yourself!

March 14, 2010

Mortgage Amortization schedule

As I promised in the Standard Deduction post, here is another spreadsheet.  This one is a mortgage amortization schedule spreadsheet.  Ever wonder how much sooner your mortgage would get paid off if you paid $50.00 a month extra?  Or how about a $2,000 one time extra payment because of a big tax refund?  You will be able to find out by inputting just numbers into four different cells.

Mortgage Amortization Schedule

1.)    Current Loan balance-In cell F1 input your current loan balance.  Note that this is your current balance not the original amount you paid for the house but rather how much is owed currently.

2.)    Payment-In cell F2 enter your principal and interest payment per month.  This does not include any taxes or insurance that is included in your payment just the principal and interest.

3.)    Interest rate-In cell F3 enter your interest rate.

4.)    Current month-Enter the number of the current month (IE January=1, February=2, March=3, etc).  For example since the current month is March, I would enter the number “3” in the spreadsheet.

5.)    Extra Principal-Enter any extra principal payments made in the month in the “Extra Principal” row for the month(s) that you made the extra payment.

Also remember that this spreadsheet will only work for those who have a fixed rate mortgage.  I hope those of you who are trying to pay off their mortgage early will find this spreadsheet helpful.  Feel free to comment if you have any questions or suggestions and please let me know if you find this helpful.

December 23, 2009

Home Evaluation Comparison

Filed under: Excel fun, Mortgage, Personal Finance, Real Example, Uncategorized — Tags: , , , , — thebalancedspreadsheet @ 1:57 pm

As a follow up to a post I made earlier in the week on online home evaluations websites that was based on the article  “Value judgments“, I decided to do a group comparison, using the websites listed in the article, on my condo and see how close each one was to one another.  I took the six mentioned, Chase Bank, Cyberhomes, Eppraisal.com, RealEstate.com, Realtor.com, and Zillow.  In addition, I included the average sales price of condos in my development over a 6 month (2 units) and 1 year (4 units) period.  I came out with the following results:

Home Evaluation Comparison

Home Evaluation Comparison

A few things that jumped out at me:  Both the 1 year and 6 month actual sales data were higher then all but two of the websites.  That kind of surprised me as going into it I figured the websites would overvalue the house compared to actual sales data.

The realestate.com number was the middle point in a range.  Unfortunately the range was about $30,000, which is not really helpful when you are talking about a $100,000 home.  Even if I included the high range it still would have been the lowest estimate by far.

Overall the average price is inline with the $95,000 I have currently on our balance sheet.  I think every few months it will be good to checkup and do another comparison to see if there has been any movement in the price.  After doing the comparison I feel comfortable with the number and probably will not change it.  Hopefully in the spring when real estate starts to pickup more units will be sold and the value will increase.  Doing the comparison was fun but I would not, and do not, put much stock into the results as a “definite” on what my condo is worth.

December 21, 2009

Are Mortgage Evaluation tools accurate?

Filed under: Mortgage, News Review, Personal Finance — Tags: , , , — thebalancedspreadsheet @ 2:21 pm

Jim Weiker wrote an excellent column on Sunday in my hometown paper The Columbus Dispatch titled “Value judgments”.  The article took a look at online home evaluations websites such as Cyberhomes, RealEstate.com, Zillow, and others and compared their estimates to the actual sales price of recently sold homes in the Columbus, OH area.

The article had some good research as they used 27 recently sold homes and came up with the following results:

“A Web site operated by Chase Bank was the most accurate of the sites examined. The site, http://www.mortgage.chase.com, offered the closest estimate 13 of the 27 times.”

“The least-accurate sites were Zillow and RealEstate.com, an arm of the home loan company LendingTree.”

While these websites can be helpful, they are not the end all, be all and should be used with caution:

“‘It’s a good place to start if you’re trying to figure out the value of your home,’ said spokeswoman Mary Kay Bean. ‘It’s not the same as having an appraiser come in and evaluate the home.'”

The sites don’t know the condition of the home or an owner’s eagerness to sell.
   
They tend to be more reliable in areas of similar new homes, which offer plenty of comparisons, but less trustworthy in old neighborhoods or rural areas where one-of-a-kind homes are more common.

This was a fun article to read as I try and keep an estimate of our homes value each month in our net worth updates.  I have written before that I am constantly trying to find the best way to determine its value and have used these online estimates often.  However there can be big swings from month to month and I have often questioned the estimates given each month and I am not the only who is experiencing it.  Jonathan over at mymoneyblog.com had a great post a few months back asking if internet home valuation tools are worth it.

Like the article states, these sites can be good place to start to get a rough estimate of a homes value, but there are many factors in determining a home’s value and ultimately the best way to get a solid estimate is to get an appraisal done.  Personally I just use these sites as a rough estimate to see the estimated value on my personal residence.  When we start looking for a house in the next year or so I will not be using these sites as a guide in determining what house are for sale below market value or how much to make an initial bid on. 

In the net few days I am going to do a group comparison using all the different sites and see how close I come to the $95,000 that is currently on our balance sheet.  It should be an interesting experiment!

Does anybody else know of any other good home evaluation websites not listed in the article or had any similar experiences using their evaluations?

October 29, 2009

The Mortgage Interest Myth

Filed under: Goals, Mortgage, Personal Finance — Tags: , , , , , — thebalancedspreadsheet @ 8:33 am

Those of you who have visited The Balanced Spreadsheet for a while now, know that one of our financial goals is to pay off the mortgage as soon as possible.  As I wrote in “To pay or not to pay” some people cite the mortgage interest tax deduction as a reason to not pay down the mortgage.  Today I am going to explain why this reason is a complete myth. 

For our example, let us assume you have a mortgage balance of $200,000 at 6.0%.    That means you will pay $12,000 of interest during the year.  If you itemize your deductions you will be able to deduct the $12,000 off of your income.  If your income for the year was $100,000 you would then pay taxes on $88,000.  This would put you in the 25% federal tax bracket if you are married filing jointly.  This means you would have a tax savings of $3,000 ($12,000 x .25).  So basically you are paying the bank $12,000 so you do not have to pay the IRS $3,000.  That is definitely not a winning game plan.  If you really want the tax deduction just give $12,000 to a charity of your choice, that way you still get the deduction but you do not have to go into debt to get it. 

Bottom line is this:  If you have a mortgage and are able to deduct the interest on your income taxes then do it!  It is a nice benefit to have come tax time.  However there is absolutely no reason to keep the mortgage just for the tax deduction.  Sadly there are some financial and tax advisers, who are other wise good, that will advise you to keep the tax deduction.  If my advisers give me that advice then I am getting a new one.  🙂

September 24, 2009

Should I Refinance? Part II-The Final decesion

Filed under: Excel fun, Mortgage, Personal Finance, Real Example, Simulation — Tags: , , , , , — 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.

Closing Costs-With refinancing the first question is, how much are the closing costs going to be associated with the refinance? Refinance closing costs can kind of be tricky to determine. The best I can find is a refinance closing cost calculator from Freddie Mac’s website. It estimates my closing cost to be approx $1,687 before tax savings. That means I need to have savings greater then that for a refinance to be a good financial decision.

6.1% vs. 4.75%-After I calculate my closing cost I am now ready to run the simulations. While keeping the same $2,218.10 principal and interest payment as my accelerated monthly payment , I come up with the following amortizations schedules:

6.1%
4.75%

When comparing the two schedules, the gross interest saved is $2,772 ($11,142.75-$8,370.58).

After tax savings-The $2,772 is pre-tax however. Because mortgage interest can be written off your federal income taxes as an itemized deduction, paying less mortgage interest means paying more federal income taxes. Now no one knows what tax rates will do in the future and I am not trying to predict what congress will do . I am using a 15% tax rate which is the bracket my wife and mine’s are in for 2009. When adjusting for taxes I find that I would approx save $696 by refinancing. The breakdown:

Total Interest saved

Total Interest saved

Breakeven point-I then found out that my breakeven point would be after the 24 month mark, which would be September 2011.

refi after tax breakeven point

refi after tax breakeven point

 

The Final Verdict-So is it worth it to refinance to save a grand total of $696 but only if I stayed in the condo more then 24 months would I see any return?  In the end my family decided against refinancing.  The savings simply was not worth the time it would take back to recoup my costs.  If we were not planning on paying down the mortgage as quickly as we are, then refinancing would probably make more sense.

Even though we did not end up refinancing it was still worth it to run the simulations and figure out what the best option was.  I hope you found the mortgage series worthwhile and educational.

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?

September 17, 2009

Expedited Mortgage Amortization Schedule

Filed under: Excel fun, Mortgage, Personal Finance, Uncategorized — thebalancedspreadsheet @ 10:56 am

Way back when I discussed the topic of whether or not it was wise to pay down the mortgage or not, I promised that I would post our current mortgage debt situation.  Well almost a month later I finally have gotten around to it!

A few notes first:  I purchased my current residence in August of 2006 for $118,500 on a 30 year fixed note at 6.10% with no money down.  Unfortunately I had the foresight to buy at the top of the housing bubbleL.  Putting no money down is definitely not the way to go, as less then two years after getting the mortgage, the condo was under water.  The last year and a half I have been making extra payment to get back to having some equity.  As I mentioned in my latest net worth update, I have the house valued at $95,000 which maybe is a tad conservative, but I would have rather underestimate then overestimate. 

Currently our payment with insurance and taxes is $999.24.  We are currently adding $1500.76 per month extra in principal payments, for a total monthly payment of $2,500.

Mortgage Amortization Schedule-Word Format

As you can see from the spreadsheet, we are really making some headway toward completely paying off the mortgage!  Our current balanced is a tad over $90,000.  November’s payment is highlighted in light green because that is the first month we would have equity in our house after realtor fees if we had to sell ($95,000 sales price less 7% realtor and listing fees).  Based on our current payment schedules our mortgage would be paid off on June 1, 2013.  That would mean the total length of the mortgage would be 6 years and 9 months!  Obviously this is assuming that my wife stays employed that long.  One of our financial goals is for her to come home once we start having children.  We plan to have children before 2013 so our payment schedule will probably be slowing down.

Tomorrow I will look into the possibility of refinancing to a lower rate.  Currently rates are in the mid to high 4% range, but is it worth it to pay the closing costs  if you are only going to keep the mortgage a few more years?

August 26, 2009

To pay down or not to pay down?

Filed under: Goals, Mortgage, Personal Finance — Tags: , , , , , — thebalancedspreadsheet @ 2:47 pm

One of the greatest debates in the financial world today is whether or not to pay off your mortgage early or ride the mortgage out for the full term.  There is very passionate debate in the blogosphere world from both sides on this.  There are those like Ric Edelman who believe in never paying off your mortgage, while others believe in paying off the mortgage ASAP.  If you have read our financials goals summary or the full post you know that my wife and I believe in paying off the mortgage, but only after 15% of our pre tax income is going towards retirement.  This plan is similar to the one Dave Ramsey uses.  Below are some points each side makes followed by what my family settled on:

Reasons to keep the mortgage-The main reason to keep your mortgage and not pay it off is because you can invest your money at a higher interest rate.  While most mortgages are in the neighborhood of 4.5-7%, there are many mutual funds that have a long track record of returns greater then 10% annually.  Instead of paying down the mortgage, just invest extra into these funds and over time you will have more wealth.  Another argument made by people who keep their mortgage is that you get a tax write off on the interest paid on your federal income taxes if you itemize.  So essentially a portion of your interest on the mortgage is being paid by the federal government.

Reasons against keeping the mortgage- To sum it up in one word . . . . RISK!  Finding investments that earn greater returns then your mortgage rate sounds great but what happens if when your investment returns go south and your house value plummets?  If it sounds like I am talking about our current housing environment, it is because I am!!!  In the last few years we have seen housing prices plummet all over the country.  By not paying down the mortgage you could be underwater (you owe more on the house then it is worth) and your investments worth about 60% of what they were two years ago.  You get handcuffed because if anything happens to you like you lose your income due to job loss or have health problems and need to move, you will not be able to move unless you can pull off a short sell.

Reasons to pay down the mortgage-Not owing anybody a dime is a felling that I can only imagine.  Paying down the mortgage is a safe, guaranteed investment.  My paying extra on the mortgage it is essentially like a savings account at whatever interest rate your mortgage rate is.  Since interest rates are currently at all time lows, paying down the mortgage is a better “investment” then a CD or money market account.  For those who struggle savings this is a good tool because it is a lot harder to get the money out in equity in your home then to take out money in the bank to make impulse buys.  In addition, once the house if fully paid off there is increased cash flow.  Mortgage payments makeup somewhere in the neighborhood of 25-35% of take home pay for the average worker.  This freed up cash allows them to make other investment as well as enjoy more things.

Reasons to not pay down the mortgage- Having a mortgage is a good hedge against inflation.  I am not going to explain in detail how having a mortgage can be a good thing during periods of inflation.  Truthful lending explains it a lot better then I ever can.  However this is a really interesting point to ponder because most people feel that will all the government borrowing we have had in the past year that inflation is due to occur.

After taking arguments from both sides and comparing the pros and cons, my wife and I decided that paying off the mortgage will be the best thing for our financial future in the short term and the long term.  Being able to walk through our house while having title free and clear will be a great feeling as well as free us to do save more cash which will in turn create more wealth. 

Coming up in the next few posts I will explain our plan to pay off the mortgage sooner.  That will include an amortization schedule, possible refinancing issues, as well as plans that help you pay off your mortgage sooner such as bi-weekly plan and mortgage acceleration plans.

So what is your opinion of the mortgage?  Get it and keep it or get it and pay it off?  Let me know your experiences below.

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