I'm a numbers guy, and I love math. Despite this, I almost made a huge mistake on my mortgage refinance.Let me explain: I had a 30 year fixed mortgage at 5.75% and had been watching the rates drop. I decided to re-fi when they hit 4.75% fixed for 30 years, no points. This one point spread is the "rule of thumb" for refinancing a mortgage. When you are saving one point, it usually makes sense to re-fi. I had the paperwork drawn up and was ready to sign it when I decided to "do the math" first.
I visited my favorite mortgage site, and opened excel. What followed was a quarter-hour of work that netted me $6,348 a minute in pure profit. Yes, by doing some math I saved us $95,000 of real cash.
What was blinding me was the new mortgage payment with the 4.75% rate - it was $300 less than my current payment per month!! No brainer, I thought. Not so fast. Over the last 5 years, I paid down a bunch of principal so the new loan wasn't apples to apples. When I looked at interest over the life of the loans, here is what I found:
-$69,601 of interest already paid.
-$165,225 to be paid if I just kept my current loan.
-$168,125 to be paid if I refinanced to a whole point lower. That's a loss of $2,900 (plus closing costs).
How can this be? A point saved, and paying more? The simple answer is that I just made my mortgage a 35 year mortgage.
The loan I ultimately chose (and closed on today) was 4.375% over 15 years (also with no points). The new interest will be $69,996 over the next 15 years - a difference of $95,228.
Thanks Dan!