I recently had the pleasure of helping out a client looking to refinance, who posed a variety of challanges. First challenge was getting the best variable interest rate possible for this extremely well qualified buyer. Next was to make sure he did not pay any legal fees, appraisal costs, or title insurance costs to save around $2,000 in closing/ transfer costs. Also, prepayment options of 20/20 per year. Finally he is looking at selling and buying a larger more expensive home in the next few months, so we needed a portability option for the future.
This deal left a limited amount of lenders who could finance the deal and do a no-fee refinance and save a few thousand dollars. He had 2.5 years left in his current mortgage term with a balance of around $277,000 at a rate of 4.65% and his payout penalty was around $3,000. At current interest rates he will save approximately $13,000 in interest over that period now.
However, because when you renew your mortgage lenders often try to give you the same interest rate as before and rates could be up by 2013, I also did a 5 year difference. In 5 years he would save around $20,000!!!!!!!!
Here is how those numbers brake down over 5 years in interest payments with weekly payments and approximate figures:
2.25% (-.75 P) 2.30% (-.70 P) DIFFERENCE
Year 1 $6,091 $6,227 $136
Year 2 $5,874 $6,006 $132
Year 3 $5,653 $5,780 $127
Year 4 $5,426 $5,549 $123
Year 5 $5,194 $5,313 $119
TOTAL $28,238 $28,875 $637
1/2 TOTAL $14,791 $15,023 $332
Here are the interest payments for 5 years on a 25 year amortization at 4.65%, what the client was paying prior:
Year 1 $12,567
Year 2 $12,206
Year 3 $11,829
Year 4 $11,433
Year 5 $11,019
1/2 Total: $30,693
SHOW ME THE MONEY:
$30,693 What he would have paid over 2.5 years at current rate.
$15,023 What he will pay under current conditions at variable.
$15,670 Gross Savings
($3,000) Early Pay Out Penalty
$2,000 No Fee Refinance Savings
$14,670 Approximate Net Savings for Refinancing
He also asked how would this affect his payment, and if there would be any extra interest payments if rates rose to say 8.25% and 8.30%. Here is how they broke down on a 5 year basis:
8.25% 8.30% DIFFERENCE
Year 1 $22,172 $22,305 $133
Year 2 $21,677 $21,808 $131
Year 3 $21,141 $21,270 $129
Year 4 $20,559 $20,686 $127
Year 5 $19,929 $20,052 $123
TOTAL $105,478 $106,121 $643
As you can see the difference between the (P-.70%) and (P-.75%) is again $643 or close to the original $637. This happens because you are only paying interest on principal so the rate can be 120.25% to 120.30% and it will still be around $640. So this leaves him with a savings of $14,000. Very smart guy, that is a good weeks work, when from application to closing he had to spent a maximum 5 hours.
With his great credit and equity we had an option between best rate or no-fee refinance. Difference from best rate to no-fee refinance rate was .05% so over 2.5 years would be $330 approximately, however he would save a minimum $750+ HST on lawyer fee and a day off work, possibly $400 for an appraisal, $300 or so for Title Insurance.
Now we look at mortgage portability. When he sells his home and buys a new one he can transfer his current mortgage and rate to a new home if interest rates are in his favor. His new home can be more expensive as long as he can financially afford it and the lender allows it. He can also add a spouse to the ownership/ or transfer it to them. If not he can sell, brake the mortgage contract, pay a small fee and pull out his equity.
My client is even smarter in paying off his mortgage he is going to keep paying the same amount he did with his previous mortgage, and pay off the balance even soon. Should be mortgage free in 15 years opposed to 25.
To find out how to pay your mortgage off faster, refinance, the more specific numbers send me an email at firstname.lastname@example.org.