Q: Is this worth refinancing? There are no calculators that work for this situation: 30-year, $369,000 mortgage at 4.875 percent that started in October 2010. I began prepaying $350/month immediately. I’m now being offered a 20-year, zero cost refinance for a balance of $332,000 at 4.375 percent starting in April 2014. A: Is it better to prepay or refinance? That's always a good question, and your prepayment of $350 per month is a substantial one. But can you do better?
A: The should-I-refinance question is always tricky. However, there actually is a calculator which works for your needs: HSH.com’s PreFi Calculator.
Utilizing a prepayment refinance calculator
Step 1 (without prepaying): We plugged in the numbers you provided. With a $369,000, 30-year fixed mortgage rate at 4.875 percent and NO prepayment, you have a monthly principal and interest payment of $1,953 and would be on a path to spend $334,404 in interest cost over the life of the loan, which wouldn't end until September 2040. Presently, you are 40 months in and would have another 320 yet to go, and an outstanding balance today of $349,353.
Step 2 (with prepaying): With your $350 per month prepayment, provided it continues until the loan is retired, you will shorten the term of the loan to 237 total months with a total interest cost of $194,951. That's just less than 20 years. Your prepayment creates a lower total interest cost for your loan, and that interest cost matches the total cost of a 30-year loan with a rate of 3.624 percent, so it's almost as if you have already refinanced to a lower rate.
Should you refinance?
So, the question remains: Should you keep along this prepayment path or refinance?
At your present prepay rate you are already on track to retire your loan in under 20 total years. If you refinance to a new 20-year term, you'll need to consider that you've already paid interest for 3.5 years, so the total term of your loans will be 23.5 years. In order to save any money (as the calculator reveals) you'll also need to get a new interest rate for that 20-year term of 4.841 percent or lower (your 4.375 percent offer meets that test).
Utilizing a mortgage calculator
Jumping over to HSH.com's mortgage calculator and looking at the costs of a 20-year, fixed-rate mortgage at 4.375 percent, you'll find a required monthly payment of $2,187 -- about $116 per month less than the total of your required payment and prepayment now, so there are some cash-flow savings to be had by refinancing.
The new loan would see you spend $175,449 in interest, to which you would need to add the $58,509 you've already spent over the last 3.5 years, for a total interest cost of $233,958 over the total term of 23.5 years.
Refinancing: Improved cash flow, but higher total costs
Staying the prepayment course in your present loan will give you a total term of slightly less than 20 years and a total interest cost of $194,951 over that time. In this case, refinancing will improve your cash flow a little, but will also see you incur higher total interest charges due to a longer total term. Also, unlike a refinance, your prepayment is voluntary, so you could stop if the need for those funds arose.
Refinance AND prepay
Of course, you could refinance and then make prepayments of that $116 in freed-up cash flow, but that's a whole different question to be answered. If you want to consider this, please take a look at both calculators, run the numbers and see!
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.