Tell me if I’m wrong.
We just closed on a refinance of our home mortgage. It was a long, drawn-out process, but it is now over and we have a better rate for our 30 year mortgage (less interest owed) and lower payments (more flexibility with our budget and the property).
Here are the details (numbers rounded and approximated at times):
Previous mortgage: purchased in October 2007; 30 year, fixed mortgage rate at 6.375%; we purchased our home for approximately $207,000; we put $42,000 (20%) down; total mortgage of $165,000; our payment was $1,028; we paid $0 in closing costs after seller credits of $5,000; we paid $39,000 in interest over the last 3 years and 10 months; and we stood to pay $205,000 in interest over the life of the loan.
New mortgage: closed in July 2011; 30 year, fixed mortgage rate at 4.875%; new total mortgage of $159,000; new payment of $842; we paid closing costs of $1,000 after lender credits of $2,000; we stand to pay $144,000 in interest over the life of the loan.
Note: Current market conditions are such that we would “lose money” on the sale of our home if we tried to sell right now. Therefore, even if we leave the home in the next year, we will keep it as a rental unit.
Interest Savings and Payment Info
By refinancing, we reduced the amount of interest we will pay over the life of these loans by $22,000 ($205,000 – $144,000 – $39,000), which is nice. The way I see it, based on this savings in interest, we need 17 months to recoup the $1,000 closing costs on the re-fi. Here’s how I got that number. I spread the interest savings across all of the remain periods: $22,000 / 360 payments = $60. Then, I divide the $1,000 closing costs by $60. That gives me 17. It will take 17 periods (or months) to recoup my $1,000. If I sell the town home prior to December 2012, then this will have been a waste.
I know the typical “break even” rule of thumb on a refinance is to take the difference in payments (in this case $1028 – 842 divided into the closing costs of $1,000), but I don’t think that tells the true story. Do you think my method is right or wrong?
I’m glad we have a lower payment, for two reasons:
- First, we’ll probably outgrow the house soon. We bought this place with the idea that it might become an investment property in the future. With this new payment, the term “investment” can actually be used. If we rented out our place, we could get $1,500 a month at a minimum. Mortgage payment of $842, property taxes of $350, HOA dues of $175, and insurance of $20, would leave us with a rental unit that cash flows.
- Second, even if we don’t start renting it out, we have $186 more dollars ($1,028 – $842) in our budget each month. This will give us more flexibility as we continue to navigate self-employment.
The Self-Employment Hurdle
I’m also glad we were able to get a refinance considering my self-employment income. PT Money, LLC hasn’t exactly been reporting a monstrous income for very long. Underwriters like to see tax returns dating back two years from those of us without a W-2s. Getting approved for a mortgage using self-employment income is tough these days. My tax returns aren’t impressive (yet). But somehow, the lender (Quicken Loans) was able to get comfortable with what I reported for 2010.
There was one road block we had to cover though. We needed to pay off our car loan to clear money in our monthly expenses for my measly income to cover us for the loan. I’ll explain more about this when I do the full-on Quicken Loans review, but you get the drift, which is that I’m super stoked that we were even able to get a refinance considering our situation.
Do you think I made a smart move here? Did I get a good rate? Did I pay too much in closing costs? Did I calculate my break-even correctly?