Feb 5, 2008

I'm considering re-financing our mortgage

The recent rate cuts got me thinking about re-financing our mortgage (and I'm not the only one). We're a few years into our 30-year fixed rate mortgage so rates would have to drop quite low in order for us to end up paying less total interest than we would pay with our current mortgage, assuming we re-financed to a new 30-year fixed rate mortgage. A 15-year mortgage is out of the question since it would raise our monthly payment, something I'm not interested in at this time.

However, I came up with a scenario that makes re-financing quite attractive. It looks like we could save thousands over the years by refinancing now at a lower rate and then paying the same amount we pay on our current mortgage. Here's an example:
  • Current mortgage payment: $1200 - Total interest paid after 30 years: $120,000; interest paid to date: $30,000
  • Mortgage payment after refi: $1000 - Total interest paid after 30 years: $100,000; total interest paid if monthly payment is $1200: $80,000
Obviously, I've made up these convenient numbers, but the bottom line is that paying the basic monthly payment after a refi in this scenario would result in total interest paid of $130,000 versus $120,000 without the refi. However, continuing to pay $1200 per month after the refi results in total interest paid of only $110,000. That's basically the position we'll be in if we can get a good rate now.

The problem is that mortgage rates have been going up. And we wouldn't benefit from a refi at the current rates. But now that I'm aware of this scenario and there's a possibility that rates might go down, I'll be keeping an eye on rates and ready to pounce if they drop far enough.

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