Specific Re-Finance Questions

Not sure about the rest of your budget go 30 years and send extra.

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I have always read on here that a full percentage point is the only way a re-fi is worth it. However, is that still true if we go down to 20 years?

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I’ve always hated this advice. It’s not true and depends on a lot of factors. “Worth it” is also very subjective.

There’s a few ways to look at it depending on what your objective is, e.g. gain equity/reduce interest or lower payment.

In the simplest approach, if you looked at it as if you paid the refi fees out of pocket, so your loan did not increase at all. You extend your mortgage by one year, and it would take you 16 months to recoup the $4k you paid out of pocket. This approach does not account for the additional equity gained through the lower interest rate.

A way to look at this, notably the shorter term refi, is by the equal payment approach. If you apply the same payment to your current mortgage, when do the two lines of equity cross (or if paying fees out of pocket, equal the fees). If you can afford the higher payment and plan to be in the house through this “break even” point, it makes sense to refi.

The harder part is ensuring you can afford the increased mortgage payment. It may look attractive to refi, but houses are fairly illiquid so you can’t get out of that payment very easily.

If you want to post or email actual numbers I can calculate the time and give you actual data.

Update above post at $250k:

If we assume a $250k mortgage, at the minimum payments you would have just under $185k in interest.

Since $300 a month is affordable, at this same rate you would reduce your total interest to around $132k (and knock off about 7.5 years)

If you refinance at 30 years, your total interest would be about $155k. If you are able to pay the same as the 20 year note, your total interest would be around $99k and you would knock off just under 10 years

If you refinance at the 20 year rate, your total interest would be about $94k

Without knowing the specifics of your mortgage, it would appear that you would be spending $4k now to save somewhere between $30k over the life of the loan by refinancing at 30 years. The difference between the 20 year & 30 year is not significant enough to warrant the additional obligation.

I would consider refinancing at the 30 year and just paying the extra

Your breakeven for 30 year refi would not be until ~26 months in. A lot to go through for that in my opinion. We normally try and shoot for ~18months in why the 1% rule of thumb typically appears. Doesn't seem worth it at all to me but everyone's own situation is unique.

Breakeven for the 20yr. is ~20 months
Breakeven for the 15ys. is ~15 months

If you are sending they much extra then flip it to a 20 year. You will be in the house a while and recover the cost in relatively soon.