Mortgage Refinancing Technique... Does it work?

14 years ago

We are eight years into a 30-year mortgage. I want to refinance but I don't want to pay my mortgage for another 30 years. As the same time, I don't want to get a 15-year mortgage because the monthly payment will rise. I had an idea but I'm not sure if it will work...

Let's say my current 30-year mortgage is $200k and has $170k left after eight years. Instead of getting another 30-year mortgage for $170k, I will apply for a 30-year with the original load amount ($200k). Assuming I have enough equity to get a $200k loan and the lender will cover all closing cost, I will cash out $30k at closing. Then, I put the $30k right back into new mortgage. Theoretically, I should speed up the new mortgage by eight years. If I'm right, my new mortgage will have 22 years left and I will lock into the new lower interest rate.

Will it work? Thanks

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Comments (11)

sushipup1
14 years ago
I don't get it. You'll have larger payments with a 200K loan than with a 170k loan. Better, get the 170K loan, lower payment, but add the extra to each payment for principle.

Example: if your current payment is $1000 a month, and your new payment is $800 a month, then continue to send in $1000 a month with the excess going to principle.

Have you looked at some amortization tables? Lots available if you google amortization tables.
klau
Original Author
14 years ago
sushipup, thank you for the respond. Well, I should say I want to lower my monthly mortgage payment but don't want to lengthen the mortgage term. If I do it your way, I would shorten the mortgage term while paying the same amount per month before and after refinancing. Since the interest rate has dropped somewhat, the monthly payment for a new $200K loan should be lower than what I'm paying right now. By putting the $30k I got during closing, I think I should be able to pay off the new mortgage in the same time frame as the old one. Is it right?
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Hello Ellen J, It seems to me that you have two kinds of debt, possibly three. You bought a large asset that very few people are able to pay for with cash, namely a home. It will be an asset that will provide benefit for years, may go up in value. You paid for it with a large mortgage - I note that the amount of the mortgage was close to the purchase price, so you had a minimal down payment apparently. You didn't refer to student loans, which are a major debt carried by many youngish people. They, too, are an investment from which one expects to receive a benefit for many years. Consequently one can justify paying for it over an extended period - though the longer time that it takes, the lower standard of living one will enjoy throughout that period, due to ongoing interest costs. However - how long are you willing to pay for a loaf of bread, a night out on the town, or substantial repairs to your vehicle? Thirty years? The life of a mortgage? Most credit card debt is incurred to purchase things or services that we use up right away, or over a short period. If we pay off outstanding balances right away, we are living within our means, but if we carry outstanding balances owing over a period, we are condemning ourselves to living less high on the hog in future than now, for we enjoyed that dinner out tonight, but are going to continue to pay for it for months, even years. An extra cost is that which we pay in interest on that loan. If we carry the outstanding balance over the end of the year, then we will live less well next year, for we have that interest added to the debt, every month. With credit card debts, the rate is high. And almost always non-deductible. It seems to me that you should resolve to go into emergency saving mode and pay off those current debts as soon as possible. I am not in favour of adding them to a mortgage, thus paying them over 30 years or so. Do you want to be still paying for a loaf of bread in 2017 that you ate in 2006? I think not. I am reluctant to suggest that you make your savings plan drastic, as I gather from your message that you and hubby are not entirely in agreement as to the way to handle this issue, so you may well have less than enthusiastic agreement from him as to how to deal with this issue. By the way, I agree that you should plan to pay for stuff in cash, refusing to use the credit cards. Keep one in hand, though, in case of dire emergency need. But make sure that you use it for nothing else. Are you a kid or a grown up? I have some reservation about using part of hubby's bonus for emergency fund, though as a personal financial advisor I tell people all the time that they should have one as a high priority item in their financial agenda. However, if you are paying the 18% - 28% or so interest rates on current outstanding credit card balances, doesn't it make more sense to use most of the available bonus to pay down those current debts, knowing that the one or two credit cards that you have on hand can be used to cover emergencies - and you won't have to start paying interest on such debts until you incur them, but you're paying high rates on current debt now. Good wishes for making the best decision in this circumstance, and for having the self-will and courage to see it through. Good wishes for learning how money works. It's an interesting hobby - and one of the few hobbies that pays well. If you don't boss your money - it'll boss you. ole joyful
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sushipup1
14 years ago
What about just making the same payments as the 200k loan but applying it to the 170k balance? That way you save the 30k off the top, and each month, you make the 200K payment to your 170k loan, meaning that you're putting all the extra payment straight to principle, which will drop the loan amount faster.

$200 k at 4.5%, 30 yrs = 1013.37/mo
$170 k at 4.5%, 30 years = 861.37/mo.

Take the 170 loan, make the 1031 payment, reduce your principle by an extra 152 per month. Pays off the loan 7 years faster.

Here is a link that might be useful: mortgage calculator
weedyacres
14 years ago
You are correct that if you borrow the extra $30K and put it right back on the loan, it'll cut about 8 years off the term, so you'll have a custom 22-year mortgage. But your bank might do this for you anyway. 15 and 30 year mortgages are the norm, but there's no "law" against doing a 22 year mortgage. Or do a 20-year loan, and the lower interest rate should offset the increased payment from a slightly shorter term.

Like sushipup pointed out, all the $200K loan does is give you a higher payment, which is the same as taking out a $170K loan with a lower payment, and making extra principal payments.

Are you financially able to make the payment a 15-year mortgage would entail? Because the interest rates are lower, meaning the thing would cost you less over the time remaining. That would be my first choice.
sushipup1
14 years ago
Also, if you do the extra 30K in a loan, be wary of a pre-payment penalty written into the loan. That would set you back.

And a pre-payment penalty is typically buried in the fine print that you do not even see until signing. Surprise!

I just don't see any reason for taking out a larger loan than you need in the first place.
Billl
14 years ago
Why are you trying to make this complicated? Just take out a 30 year loan for the balance owed.

Go to any online mortgage calculator and it will tell you how much to pay each month so you can pay it off in 22 years. That amount will be less than you are currently paying AND you will have the flexibility to pay less that that if something bad happens - like a job loss, illness etc.
Emilner
14 years ago
One warning about prepaying your mortgage:

Most modern mortgages do not forgo interest charges on pre-paid items. That is you do not earn or save any interest on the money you pre-pay. It is an interest free loan you are giving the bank for 20+ years. You are FAR better off putting the money in a CD, or some other form of investment and compound the interest. When the balance of the investment equals the balance of the mortgage you can just write a check- several years earlier.

Why do you think mortgage companies try to push their bi-weekly payment plans so hard? Why would they want you to pay off your mortgage early? The answer is your interest free loan to them....
weedyacres
14 years ago
Most modern mortgages do not forgo interest charges on pre-paid items.

Huh? Not any mortgage I've ever signed. Interest is calculated on the remaining loan balance, not what the balance would have been if only the minimum payments were made.
Billl
14 years ago
"Most modern mortgages do not forgo interest charges on pre-paid items."

100% wrong in the US.

"Why do you think mortgage companies try to push their bi-weekly payment plans so hard? Why would they want you to pay off your mortgage early? The answer is your interest free loan to them...."

Again, way wrong. They push the plans because they are legally obligated to accept additional payments to principle if there is no prepayment penalty clause. It is a clever scheme to get you to pay extra for that "service".
klau
Original Author
14 years ago
Thank you everyone for your advice. I'm not considering the 15-year loan simply to avoid the higher monthly payment. I really like the idea of getting a $170k 30-year loan and pay it like a $200k loan each month. It works like the way I want to with flexibility to pay less if needed. I think that's the route I'm heading. Regarding per-payment penalty, I thought it only applies if you pay off 100% of the loan early. It is there to prevent you from refinancing right away. I have never heard of penalty for accelerated payments. If it applies, I won't be able to pay the $170k loan like a $200k loan...
sushipup1
14 years ago
I haven't seen any loans that penalize small amounts of extra principle, but the penalties are for large amounts and pay-offs. Ask a loan officer for more details. I think you'll be just fine adding to your monthly payment.

Mortgage Refinancing Technique... Does it work?

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Mortgage Refinancing Technique... Does it work?

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