Re: NPNC - reply

From: owner-persfin@lists.xmission.com
Subject: Re: NPNC - reply
Date: Mon, 19 Oct 1998 21:07:37 -0400
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>I used the calculators at www.financenter.com to run a scenario 
>assuming a $100,000 mortgage.  If you're on your 48th month of a 
>15 year, 7.5% mortgage, that payment was $404 principal / $522 interest,
>with a remaining balance of about $83,000. If you refinance the $83,000 
>for 15 years at 6.5%, the payment would drop from $927 to $723, saving
>$204/month. If you put that $204 back every month as a additional
>principal payment, your very first payment would be $477 principal and
>$449 interest, and that 15 year mortgage would be paid off in 10 years
>and 3 months. That would be a small reduction in the length of the
>mortgage compared to keeping what you have now. To look at it another
>way, if you could refinance the $83,000 balance for 11 years (the amount
>of time you have left on your 15 year mortgate) at 6.5% the payment
>would drop from $927 to $881. 

I did something similar.  Let's assume I start off with a $100,000 
mortgage at 7.5% for 15 years.  My monthly payment would be $927.01/mo.  
Now lets assume after 4 years at that rate, I want to change - my two 
options are 15 years @ 6.5% or 10 years @ 6.5%.  Here's what I see:

Loan Type        Total Payments      Total Interest   Monthly Payment
- ---------------  --------------      --------------   ---------------
Straight 15 yr.  $166,862.22         $66,862.22       $927.01
Convert 15 yr.   $174,883.13         $74,883.13       $724.37
Convert 10 yr.   $157,801.60         $57,801.61       $944.21


>If it's costing you 7.5% and you reduce it to 6.5%, you're simply paying 
>less for the same 'money.' Like if you owe $100,000., you would save $1,000 
>per year. As for having a mature (4 to 5 years old) 15 year mortgage, 
>consider rewriting your current balance on a 10 year mortgage at a lower 
>rate than 7.5% (should be close to 6.5% or maybe even better - the shorter 
>term usually means lower rate - less risk to the bank) and you've simply 
>moved what you have now into lower monthly payments over the remaining term. 
>In fact since most mortgages allow you to repay faster without penalty, you 
>could put the savings each month into reducing the principal and pay it off 
>faster. 
>
>I'm puzzled at what mortgage people could say that was quantitative and 
>still discourage you. Although if you talked to the people who carry your 
>present mortgage, well they certainly don't want you to pay THEM less.
>
The info actually came from a competing bank, which would have been
happy (I assume) to get my business.  The point was that between the
cost of the mortgage (even a 0 point mortgage will cost >$1000 between
the title search, lawyers fees, mortgage fee, etc) and the paltry savings,
it wasn't a big win.  Of course that was when I was looking to go from
7.5% to 7%.  Now that rates are 6.5% it's starting to make some financial
sense.  

I'm just not sure where you're making out by dropping 1/2 a point - where
are you finding absolutely no cost mortgages?  Typically you can do that if
the bank/mortgage co. throws all your costs back into the mortgage, which
translates into a higher mortgage.  So while your monthly payments may be
less, your term is longer (more than likely), which means over the course
of the loan you're paying more in interest (see my chart above).  Just
getting a lower monthly payment doesn't mean you should refi, especially if
it means your term has been extended.

So, I understand the point you made Bob (1/12 divided by the interest * 
principle) which indicates that there really is no acceleration in paying
off the interest - but the X factor (for me anyway) is I don't know how to
go from an $A mortgage at B% over C years to an $A mortgage at D% over C 
years, where D < B.  Typically, the banks I talk to want to charge you to
do this (in which case you have to take the fees into account before 
determining how quickly you "save" money), or add all the fees back into
the mortgage, hence making it an $E mortgage (E > A) and you have the same
issue as the previous example.  

In my specific example, if I convert my 15 year 7.5% loan to a 15 year 6.5%
loan, I'll save $400/month.  I'll also extend my monthly payments for an
additional 4 years (I'm already 4 years into my existing mortgage, with 11
to go), which I don't want to do.  What I'd really like is an 11 year mortgage
at 6.5% (saving me ~$88/month).  If it's going to cost me $1500 to do this,
it will take about 18 months to recoup my costs.  Not a bad deal, since I'm
planning to stay here for a while - but I'd prefer to pay $0 up front.

Scott





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