Oh just stop people, will you? Grind through the number yourself. It might make sense to refi, it might not. It depends on your personal situation.
Here is a screenshot of the rough spreadsheet I was using for my own situation….
[img_assist|nid=25817|title=Should I Refinance?|desc=|link=node|align=left|width=500|height=800]
Let me explain how this works. (again again, this was something I put together in 15 minutes at the time. And since I’m not a finance major, this might not be correct).
1. Loan #1 represents your first loan
2. Loan #2 represents your refinanced loan
3. The loan term is in months (360 for 30 year), and the monthly interest rate is used (4% yearly divided by 12)
4. I believe the monthly payment is determined by the same formula used to determine present value of an annuity.. So the payment = p * r / (1- (1+r)^(-t)
where p is you total loan, r is your monthly interest rate and t is the loan term in months.
5. I created two amortization tables (which you can’t see).
The first table amortizes the first loan using a loan balance of $500k
The second table amortizes the second loan, using a loan balance based on the month of the first loan you decided to refinance
6. In my example (cell c11), I hypothetically decided to refinance 22 months into my 4% first loan….
a. On month #22, I would still have a principle of 483583.74 (row 12)
b. Up to that point, I would have paid 36,099 in interest charges alone (row 19) on the first loan,
c. I would have had a remaining 359347 in interest charges for the remainder of the loan
7. If my new loan was .25% lower (3.75%)
a. My total interest paid on the new loan would be $322654.8741, about $600 lower than if I finished my original 30 year loan
b. My monthly payment would be lower by $150/month (row17 and row 7)
c. If the bank was also offering $3000-4000 rebate on top of a no out of pocket closing costs (which many times they were), that’s even more icing on the cake…Free money.
Lower monthly payment, less total interest to pay, plus cash up front.
Win, win ,win.
And hence, why I was a serial refinancer of 2 years or sometimes less or if rates dropped by more than 0.25%. If you actually played around with the spreadsheet, you would notice that in the absence of any additional rebates, 22 months is roughly the cutoff for my loan balance at the time, where you would lower your monthly payments AND also not pay more total interest over the life of both loans. That 22 months extended to more months once the lenders started to get crazy and added free upfront rebate cash on top of that, effectively paying me to refinance to a lower rate and lowering my total interest.
That is not to say that refinancing even if your total paid interest goes slightly up in return for a much lower monthly payment is bad either. It depends on what you plan on doing with the extra savings in your monthly payment. I mean, with that savings in monthly payment, you could use it to pay down the principal portion of your new 30 year loan too, which would effectively lower your total interest paid on your new loan.
I just chose to keep things simple, refinance when both lower payments and total paid interest is break even or lower than before. (Well, at least until my financial situation changed for the better, and I didn’t feel comfortable leaving most of net worth in the stock market, so I refi’d to a 15 year and then eventually paid it off.)
So again, whether one should refinance or not, the answer is “it depends”.
Sorry for the long post. But unlike BG’s post, at least mine has a workable spreadsheet and data.
