Are you looking for a unique method to compare mortgages? Catherine found herself in a predicament. She has been offered two refinance choices based on borrowing $120,000. Take a look at her options.
Both scenarios have benefits so compare with these facts...
4.5 percent with $3500 in mortgage closing costs
5.5 percent with $370 in mortgage closing costs
First things first, the property appraised at $250,000 and she currently owes $92,700. Her goals are to take out cash and lower her interest rate.
We don't know her current mortgage rate so I'll take a wild guess of 6.5 percent which would make her monthly house payments $586. Assume all loans are 30 year fixed rate mortgages.
Whoa! I almost forgot a vital piece to Catherine's puzzle. She plans to sell her house in 3 to 5 years.
Now that you have the details, here is a unique way to compare mortgages.
As a side note, have you ever felt like you were on mortgage overload? Interest rate, loan amounts, closing costs, cash out, length of term, monthly payments... Yes! It is enough to make anyone want to toss up their hands.
So take a deep breath, sit back and consider the following.
Choice 1: $608 a month, $23,800 cash-out, $3500 fees
At 4.5%, her payment decreases $22 a month. But 13 years pass before she breaks even on fees.
(Calculation: $3500 / $22 = 13 year pay back period)
On the other hand, assuming she keeps the mortgage for 5 years, add the monthly savings to her cash-out for a bottom line of $25,120.
(Calculation: $22 x 5 years + $23,800 = $25,120)
Choice 2: $681 a month, $26,930 cash-out, $370 fees
At 5.5%, her payment increases $95 in part because she took out a larger loan. Over 5 years, she pays $5700 more in payments.
(Calculation: $95 x 5 years = $5700)
On the other hand, the second choice yields more cash-out because of the minimal fees. But subtracting increased payments, it gives her a bottom line of $21,230.
(Calculation: $26,930 - $5700 = $21,230)
So how can Catherine decide? Which is best? Catherine would want to consider which was more important to her, more cash now or lower payments over the next 5 years.
Which is best for YOU? If you can't decide between more cash or lower monthly payments, write to me at Ask Kate. I look forward to hearing from you!
Best Mortgage Advice On Buying Points - Tom asks if charging points is a gimmick.
How To Refinance and Break Even - John wants to break even.
Catherine's question can be found at How To Compare Mortgages
January 2016: The Mortgage Forgiveness Debt Relief Act Update.
September 2015: Fannie Mae and Freddie Mac Improve Loan Modifications.
Keep on the right path at A Homeowner's Survival Guide to the Intimidating Mortgage Process.
Please tell your friends about How to Compare Mortgages. I hope you'll come back and visit often.
Aug 11, 16 10:49 AM
Aug 11, 16 10:18 AM