My latest Refinancing Calculator

Well, last month I said we would not refinance, but just to be sure I had to write up a new online calculator to check things out! Because our current rate is a reasonably low 4.91% already, I had to call up our lender to see if there was any point in us refinancing, especially since our loan is also rather small, especially relative to any closing costs. Incidentally we used Schwab Bank who did a very good job and who I highly recommend, especially if you already have a brokerage account with them. They always gave us good rates and very quick responses via phone, e-mail or FAX. The very nice lady I talked to today was very informative and gave me today's rates on our smallish loan. Since it is under $100,000 the rate is actually a bit higher than the lowest available, 4.25% on a 15 year $90,000 loan and with closing costs she estimated at about $1,900, the closing costs would be over 2% of our loan value. They would also charge 0.25% of our loan to eliminate the escrow account and let us pay the insurance and property tax ourselves as we have done for a number of years. So my updated calculator answers the question, what would be wiser, for us to refinance our 4.910% 20 year loan or to take the closing costs money instead and just lower our overall loan balance? Our rate on a new 20 year loan was 4.54% so that was less than a 0.4% drop for us and hardly worth it. Using my new handy, dandy calculator I deduced refinancing to a new 4.54% loan makes no sense at all, and refinancing to a new 15 would take us over two years to "break even".

One thing I included on my calculator is the deductibility of the loan interest which is actually a bad thing when calculating your savings in refinancing. Since the interest deduction is a good thing in being a "discount" on your interest, when you are lowering your rate, the deductibility of your loan reduces the effects of rate reduction on your savings. Dropping a 6.0% rate to a 4.0% rate becomes more like dropping a 4.5% rate to a 3.0% if you are in a 25% total tax bracket. Plus if you are not paying very much loan interest in total, it may not be deductible at all if it is does not add with your other itemized deductions to surpass the standard deduction ($11,400 in 2010 for married filing jointly, $5,700 for singles). I believe ours may not break the standard deduction this year with our small loan amount at a rather low rate. Our current 4.91% rate on our ~$90K balance charges less than $4,500 in interest, so we must come up with $7,000 more in itemized deductions now to be able to itemize. So I calculated our savings as non-deductible (which should improve our savings), but even there our break even point is still over 2 years.

So despite having excellent credit, and the cash for closing costs easily available to do so, we probably will not refinance at these historically low rates. If either our current rate had been somewhat higher, or our loan balance had been larger we most likely would do it, but with an already low rate on a small loan, the payoff is just not there for us.