We’ll be re-financing at 5.125% or lower. Thanks to some special programs that we’re eligible for, we got a low rate with a 60-day lock and two float downs, so if rates go down between now and when we close, we’ll be able to get that lower rate. The loan officer said she thinks rates will go down in the next few weeks, so I took her advice and took the 60-day lock at 5.125% instead of a 30-day lock at 5% with no float down.
Calculating whether the refi would be worthwhile involved enough numbers to make my head spin, but the loan officer ran the numbers with me a second time and confirmed my conclusion. A key factor in making the refi worthwhile is our commitment to continuing to make our current monthly payment even though the minimum payment will be lower with the new loan.
Here’s an example of the math (I’m using round numbers for the sake of privacy and convenience – and remember, if the balances seem high, they’re normal or even on the low side for Southern California):
Current balance: $230,000
Current interest rate: 5.75%
Current monthly payment: $1460
Interest paid to date: $78,300
Interest that would be paid over life of the loan: $275,215
Balance including closing costs: $235,000
New interest rate: 5% (I’m gambling that it will go down at least this much)
Interest paid over the life of the loan making the same monthly payment as above: $175,740
Total interest paid on this loan plus interest paid on previous loan: $254,040
Difference in interest paid between the two loans: $275,215 – $254,040 = $21,175
So that’s a savings of $21,175 in this example, and the loan will be paid off in 25 years instead of 30. In our case, the numbers work out to a savings of about $30,000 over the next 22 years, and we’ll still pay the mortgage off two to three years before our current mortgage (assuming no extra principal payments).
Of course, we can always increase our savings by paying more extra principal each month, and it’s likely we’ll do that. Still, I can’t help but wish the savings were greater (and they may be if the mortgage rate goes down further before we close). But in any event, for just a few hours’ investment, we’ll have saved ourselves $30,000.
Maybe it’s time to think about re-financing your own mortgage? . . .