# Help with Refinance Calculations



## HaroldCrump (Jun 10, 2009)

Hello all,

I am 2 years into a 5 year fixed term @ 5%.
Principal outstanding is probably around $105,000 at this time.
The IRD penalty for breaking right now is $4,300.
My goal at the start of the term was to pay off the entire mortgage by the end of this term in 2012 (i.e. after another 3 years).
So far that's on track.

So my question is - given the above facts, does it make mathematical sense for me to attempt a refinance at this time?
I haven't shopped for rate quotes yet, but I'm expecting I can get something between 3.35% - 3.85% for a 3 year term (because I would still like to pay off the principal in 2012).

Most of the online calculators I have been plugging the numbers into are not coming up with meaningful answers because of the mortgage payoff fact.

Essentially what I need to determine is whether an interest rate reduction from 5% to approx. 3.50% for next 3 years will save me more than $6,000 or not ($4,300 penalty + approx. $1,700 for closing).

I suppose I better estimate the effort to shop for a mortgage and the effort to do all the paperwork as well - my and the better half's time, driving costs, phone calls, etc.

So let's say I need to save at least $7,000 for this to be worthwhile ($4,300 + $1,700 + $1,000).

Make sense?

-Harold


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## Retired at 31 (Apr 20, 2009)

With that rapid of a repayment, you'll likely be running up against the prepayment limits of the mortgage no?

My instinct is that it's probably not worth the trouble as the interest component diminishes rapidly as you approach zero principle, meaning the rate becomes less and less significant.

The bank I worked at long ago had a great mortgage calculator that allowed the type of scenario you're looking for. The online ones I've found aren't very good in comparison.


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## HaroldCrump (Jun 10, 2009)

Retired at 31 said:


> With that rapid of a repayment, you'll likely be running up against the prepayment limits of the mortgage no?


Sorry, i should have clarified.
I don't plan to make lump-sum principal payments during the term.
I'm simply stashing away the principal payment money in a savings acocunt and at the end of the term, will pay off the bank the full outstanding principal.


> The bank I worked at long ago had a great mortgage calculator that allowed the type of scenario you're looking for. The online ones I've found aren't very good in comparison.


Yeah, I would love to have a real calculator that allows me to do scenarios like that.
Or if someome can point me in the right direction, I may be able to do the math myself 
I came across a calculator at -
http://www.amortization.com
It's $39 though.
Does anyone have any experience with it?
Is is worth it?


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## stephenheath (Apr 3, 2009)

Why complicate it? Using 2% savings, which is well past your best case scenario, and using $105,000 for the whole 3 years assuming you don't have any principal payments at all, your savings would be an absolute maximum of 105,000 * 2% * 3 = 6,300, which is still less than your criteria. Realistically, assuming you're paying ~ $20,000 a year and a more realistic 1.5% savings, you could roughly save $75,000 * 1.5% * 3 = $3,375... also well short of your target. There's no scenario where you don't take a loss refinancing.

If you want to save money, instead of building up the principal balance, take advantage of the prepayment priviledges on your mortgage... that'll save you 5% on the extra principal payments for the remaining time.


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## Sampson (Apr 3, 2009)

HaroldCrump said:


> Does anyone have any experience with it?
> Is is worth it?


Harold, search MDJ's site for a post called "Should I break my existing mortgage for a lower rate". There is an excel sheet that you can work with to make this determination. Its also linked in a thread somewhere on this forum.

Send me a PM if you have any questions.

Good luck!


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## DAvid (Apr 3, 2009)

I don't understand why you have not considered using the prepayment options which should be available to you. Every dollar you place against your 5% mortgage is roughly equal to earning 7 - 8% in a savings account.

Mortgage calculators at Dinkytown.net will calculate the interest costs each year, based on your inputs. You should then be readily able to do the math. Based on your numbers (and a 25 year amortization) you would expect to pay $15030.00 over the next three years. If you switched, and followed the new payment plan (remember your mortgage payment would be smaller at the lower rate) you would pay $10475.00 in interest, for a $4555.00 difference. Putting the money you have currently saved against the mortgage would reduce the interest costs of that amount in perpetuity, and adding a monthly double up payment would further resuce your interest costs.

DAvid


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## HaroldCrump (Jun 10, 2009)

The reason I am not planning to make principal paydowns next 3 years is because the mortgage payout "fund" is also my emergency "fund".
Every year I put $20,000 in it.
This year is already done so I have $20K in that "fund" right now.
Next 3 years, I hope to continue and have $80K by the end of 2012 when the mortgage term is up.
At that point, all else being equal, I hope to use that entire fund to pay off the mortgage principal, which should be around that mark that time.

My mortgage contract has 20% pre-payment option but then I would not be left with any emergency fund - unless I get a raise 

I'll check out MDJ's spreadsheet.
But it sounds like the savings will not be more than $4,000 or so over the 3 year period, so not worth it.
$4,555 will just about cover the IRD and I'll still be on the hook for closing costs and my time/effort to do this.


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## esquif (Apr 25, 2009)

In my mortage I have the option to (re)borrow the principal I have pay in advance. So if a "big" emergency happen I can just call my bank.

Having a 20K emergency fund is great, but for the next 3 years why keep growing the emergency fund? Why not paying the 20% you can pay on your mortage? Unless you plan to have a big emergency in the next 3 years.


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## HaroldCrump (Jun 10, 2009)

You are right - the emergency fund doesn't need to be $80K.
I'm probably comfortable with $40K - $50, but no less.
That means I'm another 1 - 2 years away from that.

You must be having a re-advanceable mortgage - nice idea.
Maybe my next mortgage will be like that.


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## dogcom (May 23, 2009)

Since you already have $20,000 dollars in the emergency fund, why don't you put half the amount in the fund and the other half on the mortgage from here on. So at the end of three years you will have $50,000 plus in the savings and paid down the mortgage. Also set up a LOC and use that first if you are in trouble and then eat into the emergency fund.


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## DAvid (Apr 3, 2009)

HaroldCrump said:


> You must be having a re-advanceable mortgage - nice idea.


You should read the terms on your mortgage. Most banks will allow you to "re-borrow" additional funds you place against your mortgage. I also find it interesting that you seem to have no problem with consuming your "emergency fund" to pay out your mortgage in three years, but will not use any of it just now to reduce your debt.

I suggest you contact your bank, and learn the options available to you if you need to re-borrow additional payments applied to your mortgage. An emergency fund in the tens of thousands of dollars seems very large; are you at risk to that extent?


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## HaroldCrump (Jun 10, 2009)

DAvid said:


> You should read the terms on your mortgage. Most banks will allow you to "re-borrow" additional funds you place against your mortgage.


That would make it a re-advanceable mortgage, isn't it?
I'm rather sure mine isn't like that, but I could check.


> I also find it interesting that you seem to have no problem with consuming your "emergency fund" to pay out your mortgage in three years, but will not use any of it just now to reduce your debt.
> 
> An emergency fund in the tens of thousands of dollars seems very large; are you at risk to that extent?


Single income family, supporting aging parents living abroad as well.
Main risk is that of job loss and not being able to find another one in this kind of economy.
That is the primary purpose of the emergency fund.
To answer your question, there is indeed risk that at the end of next 3 years I may throw all my savings at the mortgage and then be left with nothing (other than some RRSPs).
If there is an emergecy shortly afterwards, I'll come up short.
However, the incentive is getting rid of the mortgage once and for all and never having to deal with the bloodsuckers again.



> I suggest you contact your bank, and learn the options available to you if you need to re-borrow additional payments applied to your mortgage.


Are you suggesting an HELOC as an "emergency fund"?


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## Shayne (Apr 3, 2009)

*It won't work!*

It is mathematically impossible for you to save money by refinancing. If the sole reason is to save money on your mortgage it is pointless. Good job on paying that down though!


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## HaroldCrump (Jun 10, 2009)

Shayne said:


> It is mathematically impossible for you to save money by refinancing. If the sole reason is to save money on your mortgage it is pointless.


Good, thanks for confirming that.
I am curious what calculations you used to arrive at that answer.
Please let me know.
If you used a tool/calculator, which one?


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## Sampson (Apr 3, 2009)

Shayne said:


> It is mathematically impossible for you to save money by refinancing. If the sole reason is to save money on your mortgage it is pointless. Good job on paying that down though!


This is not true. With a combination of lender incentives (cash back, different pre-payment options etc) and by maintaining your payment amount (i.e. not making the minimum even after you get a lower rate) you should be well ahead of the game even with IRD penalties.

The key is how you handle the penalty, if you can pay it out of pocket as Harold probably can, that'll be a huge advantage.

If you roll the penalty into the new mortgage, and only make minimum payments at the new rate, it is certain you'll come out behind.


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## Sampson (Apr 3, 2009)

If you haven't found it yet, here's a link to MDJ's post.

http://www.milliondollarjourney.com/should-you-break-your-mortgage-for-a-lower-rate.htm


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## Shayne (Apr 3, 2009)

I will stick with it still being mathematically impossible. If you take into account the penalty, the legal fees and the fact that he wants it paid off in three years the math does not work. These costs have to be factored in. 

If you save $X.XX of interest and your penalty is $X.XX + $2000 you are short the $2000.

I will show the math when I have some more time, if anyone can show different, feel free.

I modified a calculator from www.vertex42.com to get this information. 

After reading some of the other posts I would have to agree that you may want to consider prepaying the mortgage and leave your emergency fund at $20K. Unless your employment is not stable or you are expecting an emergency the money would be better used paying down the mortgage.


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## Sampson (Apr 3, 2009)

I'll stick with it is possible to come out on top.

With your same example,
$X saved in interest.
$X payed out in penalty.
+ $0 payed in legal and closing fees - many lenders/brokers will take a hit on their own commissions or you can not use any legal representation and have a 'neutral' 3rd party do all the paper work for both parties.

So result of this no gain, no loss.

The most important aspect you aren't considering is the what you do with the savings. If you use the $ saved on each payment and prepay into the principle for the entire remaining term, then you WILL come out on top.


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## Sampson (Apr 3, 2009)

Here are some examples.

Original mortgage
$300000 mortgage balance - 5.79%
Monthly payment = $1882

After 3.5 years balance = $289761

New (lower rate mortgage)
$299761 balance (penalty of $10000 rolled in) - 3.9% for 5 years.
Monthly payment = $1561
Legal, closing and other fees = $0
Cash back bonus = $7000

a) $321 savings every month, over 3 years (end of original term) = overall savings = $11556 + $7000 cash back = I'm ahead $18556, but my remaining balance after 3 years will be about $7974 more than if I don't break. - I'm still ahead $10k.

b) If I take that $321 each month and pay down principle, after 3 years, my balance remaining will be $8626 LESS than if I stayed at the higher rate + $7000 cash back. - After 3 years, I'm ahead by $15k.

c) If I can pay the $10k upfront, I have even FURTHER interest savings.


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## stephenheath (Apr 3, 2009)

Sampson, you're saying that there are situations where it is possible, but you're not using the original poster's data. 

The original poster specifically said that the principal is $105,000, that the maximum term remaining is three years, that the maximum savings he expects is 1.65% (5% - 3.35%), and that he wants to save $7000 to make it worthwhile. With that data, Shayne is correct, it's impossible. Heck, even if no principal payments were made, just interest payments, the savings would only be $105,000 * 1.65% * 3 = $5,197.50, still not enough, with those data points.

Your example has a principle balance that is three times greater, a timespan of five years instead of 3, and a cash back bonus that the original poster did not include in his interest rate estimate, and no legal or closing fees. Now, if your point is that the original poster should investigate what the rates would be with cashback bonuses, or if another lender would eat the fees to get the business, then by all means that might make it possible because it would change the data points that were given.

That said, it might be tough to find a lender willing to eat such big fees for a three year term, and I quickly scrolled through a local mortgage brokers' listings and he doesn't list any cash back offerings for 3 years, only for 5... that's not to say they don't exist, but they might be harder to find or come with a higher interest rate premium which would negate the benefit.


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## Sampson (Apr 3, 2009)

My mistake guys 

For some reason, I thought Shayne was saying the one can never save when refinancing, and additionally for some reason I didn't think the OP's numbers were all there.

I guess I'll have to crack. After rereading many of the posts, since its at the end of the amortization, there's so little interest left to pay - best to just pay it down right away.


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## Shayne (Apr 3, 2009)

Although the OP is saving the extra rather than applying it to his mortgage here is the data to back my claim that he will not save or come out even:

To have a $105K mortgage at 5% paid off in 3 years payments are $3,144.53 per month with total principle and interest paid being $113,203.

Same balance, same payments with an interest rate of 3.35% and the mortgage is paid off in 2.92 years with the total principle and interest paid being $110,335.

The difference is $2,868. OP quotes penalty and fees totalling $6,000. If the new lender ate the legal fees you are looking at only a penalty of $4,300. 

On a $105K loan there is only so much commission on a three year term for a broker, say a maximum of $600 before taxes, $400 after taxes. You will not see any cash back on a 3 year deal.

Being generous, it will take spending $3,900 to save $2,868 and that is if you can get the rate of 3.35% for three years and the broker does the deal for free.


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## Shayne (Apr 3, 2009)

Sampson said:


> My mistake guys
> 
> For some reason, I thought Shayne was saying the one can never save when refinancing, and additionally for some reason I didn't think the OP's numbers were all there.
> 
> I guess I'll have to crack. After rereading many of the posts, since its at the end of the amortization, there's so little interest left to pay - best to just pay it down right away.


 It happens. And I went through all that work. Oh well!!


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## DAvid (Apr 3, 2009)

HaroldCrump said:


> That would make it a re-advanceable mortgage, isn't it?
> I'm rather sure mine isn't like that, but I could check.


Nope, not a re-advancable mortgage -- That product allows you to re-borrow the base principal you pay. I'm speaking about just about all mortgages which allow you to re-borrow the EXTRA principal you pay.



HaroldCrump said:


> Single income family, supporting aging parents living abroad as well.
> Main risk is that of job loss and not being able to find another one in this kind of economy.
> That is the primary purpose of the emergency fund.


Then it would appear even more important to get your money working better for you. A savings program ain't it.




HaroldCrump said:


> To answer your question, there is indeed risk that at the end of next 3 years I may throw all my savings at the mortgage and then be left with nothing (other than some RRSPs).
> If there is an emergecy shortly afterwards, I'll come up short.


So, why are you prepared to accept that risk in 3 years, but not today? I expect you are thinking you can access the equity you have in your paid off house. You can do the same today, by placing your savings against your mortgage, reducing your costs, and still being able to withdraw those savings from the mortgage.



HaroldCrump said:


> However, the incentive is getting rid of the mortgage once and for all and never having to deal with the bloodsuckers again.


Do you feel that way about all those who provide you a service for a fee? You seem so averse to discussing your needs with your banker, that you are missing out on an opportunity to better meet your financial needs.




HaroldCrump said:


> Are you suggesting an HELOC as an "emergency fund"?


NO! I have repeatedly suggested using your mortgage as a reverse savings account, and using your current savings to lower your interest costs, reduce your mortgage period, and still be able to access that money with a day or so notice.

DAvid


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## DAvid (Apr 3, 2009)

Looks like CBC has finally caught up with Canadian Money Forum.

http://www.cbc.ca/consumer/story/2009/07/16/mortgage-refinancing.html

DAvid


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## Shayne (Apr 3, 2009)

Article makes sense, but one you have all the information you have to do the math. Although not very prevalent with the folks who frequent this forum most Canadian family's are carrying a lot of high interest credit card/loan debt. If that is rolled into the refinance you will come out ahead more often than not.

Just have to make sure the family changes their spending habits and they don't run up the high interest debt again!


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## specialk (Jul 14, 2009)

I will take a crack at this. Given the scenario given by the OP, it is clear that there are many uncertainties in his life and who are we to say how big the emergency fund is? I am personally good with much less, but that's my life not his. That being said, I just ran the numbers for the current scenario at 5% and then the theoretical scenario at 3.35 assuming you continue to pay the same amount you are currently thus paying a bit extra then. You would save about 4500 in interest if I am doing that right. So it's up to you if that is worth it. But of course you have many other variables like the option to pay larger chunks instead of emergency fund etc. Either way, regardless of the math, I really support your idea of having a big emergency fund before even worrying about paying off the mortgage faster...good job!
ps I am using this calculator here...it's free 
http://www.hsh.com/cgi-bin/flap.cgi?prin=150000&int=3.35&term=3&strt=Jan&stry=2009&full=Yes&ppay=110.27&apay=0&pay1=0&ppno=0


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## dcaron (Jul 23, 2009)

*Federal Govt mortgage prepayment calculator*

I find this tool particularly useful for determining your prepayment options and interest costs scenarios. Even my banker was impressed with this tool. Also check/click on the summary report button on the bottom of the page.

http://www.fcac-acfc.gc.ca/iTools-iOutils/MortgageCalculator-eng.aspx


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