# Should we refinance?



## hfxtrader (Apr 5, 2009)

Hi everyone... I would like to ask for your insight about refinancing our mortgage.

Here's the situation: We are locked in for 10 years at 5.79% amortized over 21 years. We have a balance of $91,000. Purchased price on the condo was $130,000. Our contract allows us to pay down up to 20% per year, which is just over $18,000 this year. 

Here's the question: Should we borrow $18,000 at a lower interest rate and apply the loan directly to the principal of the mortgage? Is there another way to do this? The goal is to reduce the overall cost of the mortgage and the amortization period.

Any thoughts?

Thanks
Stephan


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## ShowMeTheMoney (Apr 12, 2009)

Sure, if you can afford the extra payment that you'll have to make and pay off the loan quickly should interest rates go up (if your 2nd mortgage is variable rate). Also consider if the interest rate differential is worth the fees you might have to pay to set up the second loan. 
If you can afford increased payments then most contracts allow you to increase your payment by 15 or 20% per year, so you may want to consider doing that.


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## stephenheath (Apr 3, 2009)

Is it really worth it? Let's say there is a 2% interest rate differential on the new loan... you'll only be saving 2% on 18,000, not the entire mortgage. Let's say you plan to pay off the second 18,000 in two years. Using a very simple interest rate calculation, you would be saving a grand total of $180.00 in interest. But now you are committed to this second monthly payment of at least $750 per month (again, assuming two years).

If instead you just put an additional $750 per month on your mortgage, sure, you would, over the two years, pay $180 more, but you'd be less prone to problems if something happened, like a job loss, and yet you'd still have the benefit of saving the big interest, which is the interest savings on your primary mortgage from paying it off early. 

In short, if you absolutely have the money to pay off the second loan, you're not much farther ahead by doing a second loan than just paying down the mortgage directly, but if anything happens and you don't have the money for the second loan, you've made your life a lot more difficult.


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## Hampton N/S (Apr 3, 2009)

Hello HFX trader, 
I have used any extra cashflow to pay down the mortgage with lump sum payments.
With online banking you can do it as often as you wish, just not more than the limit each year. Our limit was based on the original mortgage amt - not the balance. 
I found this less stressful than taking on more debt, as was noted - given the uncertain times ahead. 
If you know you can increase your monthly mortgage pymt by $50 then certainly set that up because as it is automatic you won't be changing your mind, or missing it. Also, you can go in and change that upwards anytime, as many times as you like - just not over the limit.
I always enjoyed making a lumpsum payment, and rerunning the amortization schedule to see the decrease in overall interest costs, and the reduced amortization period - I recommend that you do that - it's positive reinforcement that is addictive. 
Best of luck with your goal.


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## DAvid (Apr 3, 2009)

There are some handy spreadsheets at http://www.yorku.ca/amarshal/mortgage.htm you can use to see the difference small changes make to your mortgage. There is also a wonderful set of tools at: http://www.dinkytown.net for both US and Canadian financial systems.


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## Shayne (Apr 3, 2009)

How long have you been in this mortgage? If you have been in it for 5 years or more they cannot charge you IRD, only 3 months interest. If you send me all of your mortgage info I can tell you if it make sense to refinance.


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## BCD (Apr 30, 2009)

I have 5 year term closed fixed mortgage of 185,000 at 4.98%. Now after 2 year my principal left is 157,000. Will it be worth to refinance or pay extra 15% every year? Any calculations, I will appreciate if someone reply.


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## Shayne (Apr 3, 2009)

In order to make the proper calculations you have to know the penalty and provide with amortization period and monthly payments.

Either way you will alway benefit by making prepayments.


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