Thank you for providing such a great video. Absolutely perfect!! The pace, choice of wording and approach etc, made it invaluable to the same level as the subject of what you were teaching us
I’ve learned this the hard way. Smart thing to do is to pay off the loan that you just didn’t have because every time we start all over again you have 360 payments to make. Please people. Amortized loans have a reverse process calculated in them. The interest is front loaded at the beginning of the loan. This is how the banks make all the money. If you must refi your loan do a shorter term and pay down the principal. Don’t start all over. This is exactly what the banks want you to do.
I agree totally. Even if you don't want to refinance, ask you bank how you can make extra payments toward PRINCIPAL to pay it off faster (some banks will automatically credit extra payments toward "prepaid interest" which is scummy and won't actually help you). A common scheme some people use at the beginning of the loan is to pay "double principal"- if on your statement it says that $200 is going toward paying down principal (the rest interest), make an additional $200 payment when you can to speed up the process.
I bet not 1 in a hundred people realize this. That is why the banks aggressively go after people to refinance after about 10 years or so, and most just start all over with a 30 year loan. I bet most banks won't participate in the scenario you outlined. That makes it much less profitable for them for sure. I am going to check around my area and see if any of them do this.
I think it depends on the situation and when you refinance. We're in the middle of refinancing our house right now and we're two years into the original FHA loan that has an interest rate of 5.25% and PMI of $110 monthly, we're going to a conventional loan with 3.25% and $0 in PMI, we'll be saving ~$350 every month. We're going to pay that $350 towards the principal every month and we'll have our house paid off in 20 years.
The 136.25 savings in interest is reducing the amount of interest you can deduct from your taxes. If you are in a high tax bracket, say 30%, then your next savings would be 70% of 136.25 or 95.38. This is only a factor if you itemize deductions which typically mean you have an expensive house and high income - say $500K, $200K/year and up.
I sell real estate and loans. Fortunately, very few people are interested in following the numbers very deeply, as few people can't confidently add, subtract, multiply and divide with confidence, using a calculator, beyond the third grade level. Here in California, where the median home is $750k, its shocking how few people understand the basics. Its great for me as a sales person. I'm not a math teacher. I'm a sales person. I will lower your payments. People understand lower payments.
I think the video is misleading (actually incorrect). The savings calculated by subtracting interests from two rates will not stay the same at all times. At some point, the payment with higher rate will pay off even more principal than that from the payment with lower rate. The "bank" way for calculating savings by subtracting payments is the correct way.
You are right that the ratio of interest to principal changes over time. But, it does not change much at all over the first few years- which was all I was talking about in this video. Since mortgages only last 4-7 years on average (before people move, refinance, or default), carefully looking at what is going on in the first few years is the most important perspective (in my opinion).
He says "the principal goes down faster" because of the $80 difference. If this was true,the entire loan would get paid off faster. This is not the case as the period is the same. The $216 and $80 don't remain constant throughout the loan. This "correct" doesn't seem too correct.
Great job Sir I was able to calculate my monthly savings after watching this video. The simplest n most understanding video I have seen so far. Thank you I just subscribed. Im in the process of referencing my home from a 4.8% to a 3.5% n i have learned how much I'll be saving. 👌🏽👌🏽👍👍
Can you show the entire mortgage schedule with the declining mortgage balances. If we compare and contrast both entire schedules we can see the big picture. Also we should talk about the consequences of property taxes when we refinance a home, and we should also include a discussion on year end tax liability differences !
Why doesnt everyone refinance as often as possible? If the bank was able to get you to sign an agreement to pay a higher rate what incentive do they have to lower that? I mean they're not cutting you a break out of the kindness of their hearts..
I looked at the "wrong way" as the short term cash investment and the "right way" as the long term investment. If you are planning to sell in 2 years, in this example the refi expense would be recouped and the power of each payment would lead to higher gains ultimately (win/win). Sometimes the money wouldn't recoup from the refi and the higher principle payments still don't catch up the difference (buying points and whatnot). I guess what I'm saying is to consider both ways.
I think you missed opportunity by not explaining why principal goes up every month. Since your first loan was for 30 years, however, you are refinancing it for 24 years only. Since you are having shorter amortization schedule compared to original one, you are paying more towards principal compared to longer - 30 years loan. (Just like 30 years vs 15 years). I think this is very helpful and positive video and would help many people in current market situation!
Good point- I'm sorry it didn't occur to me that 1) People usually want to pull principal out when they refinance... bad idea in my opinion! and 2) That people would want to refinance for 30 years, instead of the remaining time they have on their loan. Too many variables to cover everything in a simple, short video. I'll try to do a series, at some point.
Contact +1(203) 212- 9832 Or via mail@ tommylee1242@gmail.com (he does not take upfront payment) if you need help Hacking your PayPal, To fix your credit card, To fix your credit score, Western Union hack, To hack into your cheating husband phone, Bank account, PayPal, Instagram verification, facebook and many more.. His fast and reliable............
The payment is negative because it’s cash going OUT of the household. Run a calculation on an investment and it will be a positive number because it’s cash coming INTO the household. The payment savings of $136 is a simple subtraction calculation. The interest savings of $216.67 is a result of an amortizing calculation. Amortizing is “what’s happening inside of the payment “. Most people refinance or move every 5-7 years. Lenders use amortizing to get the most interest up front on the money they’ve loaned you along with any upfront fees (PV $ income)The longer you borrower the money (N) the more interest they make. A 30 year loan is front loaded with interest for approximately the first 11.5 years. A 15 year loan takes that number down to a little over 5.
There’s another factor to put in this math is the amount of time you’re in your current loan. Basic rule is if you’re 2 years or less into your current loan , and you can save 1%, then consider refi. Don’t refi if you’re 5 or 10 years into your loan unless you have an outrageous rate of 6 or 7 % . The banks love for you to start from the beginning again , specially arm rates .
Contact +1(203) 212- 9832 Or via mail@ tommylee1242@gmail.com (he does not take upfront payment) if you need help Hacking your PayPal, To fix your credit card, To fix your credit score, Western Union hack, To hack into your cheating husband phone, Bank account, PayPal, Instagram verification, facebook and many more.. His fast and reliable............
It costs a lot more to refinance than $3,000. 1% of loan ($2600.00), title fee (600.00), attorney $450.00, junk fees ($800.00). So, to refinance this house you are out of pocket about $4,500.00. If you took that amount and paid down your principal, it would knock about 2 years off the loan.
At my bank (Credit Union, actually), since I refinanced with the same place, there was no need for title insurance, attorney, appraisals, etc., and the fee was 0.75% of the balance. So, it very much depends on each person's actual costs.
Shouldn’t the new principal be a lower amount since the borrower owes less for the time the old loan has been in place? Moreover, the principal and interest mix does change from month to month as you pay interest on the outstanding principal balance not the original amount.
1) The principal is not lower- that is the amount you still owe for the house. 2) Yes, the principal/interest mix changes, but VERY slowly. For the purposes of calculating a break-even point, as long as this point is in the first 8 years, the simple calculation will be very accurate (within about 5%).
Excel and other TVM calculators put in a negative amount to show as money leaving your pocket. Money going in (the bank side) would be positive. Same thing for present and future values.
Wait... your mortgage is compounded monthly, which means what you just calculated only applies for that particular month, because the next month, your interest/principle amount would change, since it is compounded against the new principle. I found it easier if you were to build our the entire loan table, which will let you really see the difference in interest and principle, and how long it will take for you to break even.
Yes, of course it is monthly. However, these values change only VERY SLIGHTLY from month to month, so that even after 5 years the values are still within about 5%. When you are trying to estimate your break even time, these small changes are meaningless.
The same amount of savings apply by resetting the clock to 30 years post refinancing from a 3 years into 30 yr mortgage (remaining years 27) into a new 30 year mortgage?
I really liked what you did here. I just worked through my new refi using your method and it was great to see it that way. I'd like to send you the spreadsheet to check out, but I don't want post it online.
IMO, the bank's way is not just easier to understand for the layman, it's actually correct too (vs the "interest" method). how could you say that interest per month is 812.5 and 595.83 forever, when interest will actually steadily decrease throughout the years towards zero (as balance of the loan decreases throughout the years, payment stays the same of course -> interest decreases means principal increases). it's downright misleading to use this 216.67 "savings per month" number to derive this 1.15 years needed to "make that money back". This "interest" method only holds somewhat true if the home owner decide to refinance his home loan ridiculously frequently, like say every year or so. Otherwise, just listen to your bank.
I cover your point in the video. Thank you for your opinion, but to an economist the change in my net worth each month (amount of the payment going to principal) is extremely important. I am only assuming that these figures are stable in the short run. You are correct, that IF it took 20 years to break even, these calculations would be way off. However, the amounts going to interest vs. principal change VERY LITTLE over the course of 1-5 years, so it is not misleading to use these numbers. Also, since the median #years someone lives in a home they own is only 8.7 years, looking at short-term break even statistics has a use for many people. Again, thank you for the discussion!
@@BurkeyAcademy my bad for not watching the entirely of the video, and sorry if I sounded rude. thank you for the reply and insights! It's always a learning experience every day.
Thank you for the video. However, what you calculate is true only for the first 12 months! Meaning that for the first 12 months you are actually saving $216.67 not 136.25. However, once you refinance, you need to consider the whole period of the loan. Although larger share of your monthly payments goes towards your principle when you refinance to a lower rate for the first few years, but less amount goes toward your principle for future years. The average saving for the life of the loan is still $136.25. Meaning that, if you keep your mortgage until the end of it, for this example in this video 24 years, you will save $136.25 not $216,67.
Sure thing. But it matters A LOT when you save that money. Saving an extra $100 30 years from now is very different from saving $100 today, especially when that $100 now can be used to pay down debts, or invest, so that in 30 years you will be much better off financially.
Can you please give an example of a cash out refinance, for example rate going from 4.25% and $370k principal to 2.60% rate and $250k cash out. Would really appreciate it.
Excellent video, doctor. Thanks for your kindness sharing this valuable information! I'm thinking about refinancing now (June 2021) and I'd really appreciate if you can let me know whether this explanation still applies for a property whose value has increased around 60K only in 2 years since I got the first loan for my mortgage. My current interest rate is 3.875. Many thanks
Why not just add the 3k of closing costs to the 260 on the 2.75 side? The interest number you figured is only for the first month. It will keep changing.
1) I didn't add the 3k to the 260 because I personally would just pay the closing costs, and not add them to the principal amount. 2) Yes, I explained that the interest amount would keep changing... but it changes VERY slowly in the first 10 years. When you are calculating when your break-even point is, as long as the break even point is in the first 3-5 years, the method I show will be WITHIN 3% OF THE CORRECT ANSWER, and is 95% easier than calculating the precise answer. The amount going to interest only drops by 5.4% after 4 years. Awesome, right? ☺
A more accurate way to do this comparison is to run two amortization schedules on a tool like bank rate and compare difference in accumulated interest paid at different points in time where you think you might sell your house. Consider how you are paying the fees, if a portion of them are being financed then add them to your outstanding principal under the refi scenario
What about the fact that when you refinance most of your mortgage payment is reset to mostly going to paying interest like when the Mortgage was first started ??
That happens if you restart the loan for a period of 30 years- at my bank I am able to refinance but keep the same end date. At some banks that won't allow that, you could switch out a 30 year mortgage for a 20 or 15 year one, depending on how far in you are. One last option is to get a 30 year mortgage, but pay extra each month. Make sure you talk to your bank about how to so this- some of them won't count the extra payment toward paying down principal unless you make the extra payment separately and specifically designate the extra $$$ for paying off extra principal. I am lucky, at my credit union I just pay extra and they automatically apply the difference toward paying down the balance faster.
@@BurkeyAcademy Sorry - I don't understand this concept. What if I do have to do a 30 year for the New Rate? My loan amount would be lower to begin with though (you used 260k for both the current and new, but in the new shouldn't it be a lowered loan amount at that point?)
Cool video. Do you think it makes sense to refinance and get an even lower rate by changing from a 30 year to 15 year even if you don't plan on necessarily living there for the duration of the mortgage (maybe move in 5 years)? I guess my concern is that the monthly cost increases and could possibly cut into money you set aside to invest in the stock market which might have a higher rate of return because now you have more tied up into paying down the mortgage.
Sorry, but this is not the correct way to view a refinance. You have the loans being paid off in the same amount of years. You have to look at an amortization chart to find out overall interest savings as you only calculated the first payment interest difference. Every payment will be different. The actual cash in hand to someone is a better realization of the savings from refinancing if you are keeping the terms exactly the same. Also, refinancing is different for every individual. Whether they should or shouldn't definitely depends on the object of the refinance. Someone who is 65 may refinance for a different reason than someone that is 35. This is why you should talk to a mortgage broker about refinancing and if it makes sense for what your goals are.
Contact +1(203) 212- 9832 Or via mail@ tommylee1242@gmail.com (he does not take upfront payment) if you need help Hacking your PayPal, To fix your credit card, To fix your credit score, Western Union hack, To hack into your cheating husband phone, Bank account, PayPal, Instagram verification, facebook and many more.. His fast and reliable............
My correct way is not to refinance but pay additional payments to your principal balance. This way each month you’re paying less interest each month, and your building your equity. 😉 Hopefully, you’ll end up paying off your mortgage less than 30 years. Don’t buy into the the 15yr mortgage. Why? If you pay extra every month towards your principal you will see you will end up paying off your mortgage in 15 yrs or less. Not to mentioned you’re not pigeonhole into a 15 yr mortgage which is higher. Also, don’t sign up with your mortgage company to pay 2xs a month. They’re good amortization spreadsheets that you can use. Not to mention doing hypothetical what ifs if you pay extra toward your mortgage. I know this is long winded, but it works.
I know this is an old video, but i wish the rates foe refinancing in europe were comparable to the ecamples.here To refinance from 3.45% interest to the current 1.6%, the bank charges 24000 euros up front...
The calculation I show is the interest savings in the beginning, and is designed to be simple. However, in the relevant period (the first 1-7 years of a mortgage), it is very accurate for determining the breakeven period (usually within 5% of the right answer)
If you refinance all of it don't you also need to include the cost of mortgage insurance premium since you would have not paid of yet 30% of the new loan?
No- a pure refinance without pulling out principal is all I am talking about in this video. As long as your balance owed in less than 80% of the home's value, then no PMI is required.
Depends on your country, your tax bracket, and too much else. In the US right now, for many (and perhaps most) people the interest on your home won't affect your taxes because of the higher standard deduction recently implemented.
Hello Dr. Burkey. I tried to create the same excel formula but could not. I have a home balance of $299,000.00 with a 3.875% interest rate. Can you assist me with if I seek to refi with a new 2.875% rate. Thanks soo much for your great info.
Here is the extremely easy method that will give you an answer within 5% of the "perfectly correct answer". On $300,000 you would pay about 3.875% of that in interest the first year. With the new loan it will be about 2.875%, saving you 1% of 300,000 in the first year, or $3,000. If your refinancing costs are under $3,000, you will make up the difference in less than a year. This easy method ignores the fact that your balance will go down very slightly during the year, but the affect on the final answer is tiny.
I can think of two: 1) Banks charge fees to refinance, so if the fees are high enough it might not be worth it... especially if you refinance now and then decide to move soon thereafter due to changing jobs, divorce, etc. 2) Can you trust the new bank/mortgage lender? There have been some cases of banks treating payments as late when they are not, so they can charge late fee to pad their profits.
I guess that depends on the state you are in. Where I am, property is revalued every 5 years for taxation purposes, and is not related to whether or not there is a mortgage or refinance.
We are currently in the process of buying a home and we got the down payment assistance grant which pumped up our interest to 6.25 percent. We are able to refinance in 7 months and I have found some banks here that have under 3% financing would you think it would be a smart idea to refi with a bank that offers a significantly lower interest rate and refinance from a 30-year to 15?
The answer is always MAYBE. 1) Make sure to carefully look at all of the costs involved with refinancing, including any changes in amount or requirements for PMI, any refinancing penalties. The best 15 year rates on Bankrate.com right now are well above 3%, so to get below 3% there WILL be extra upfront costs (basically you are pre-paying interest, or they are adding extra money into the balance you owe, or both). 2) Make sure that you are 100 confident you can make the payment for the 15 year. 3) A big one for me is, can you trust the bank/mortgage broker you are refinancing with? Some banks will try to screw you out of money every way they can (e.g., you make your payment on time, but they post it late to charge you extra fees). So, try to check into the reputation of the bank you are financing/refinancing with (Yelp, LendingTree, NerdWallet, Clark Howard clark.com/homes-real-estate/refinance-guide/). This is a decision that can either save or cost you a lot of money, so take the time to consider everything carefully!
This method does not make sense to me. The first mention makes more sense. All one need to compare is the amount paid each month. At the end of the period the result is the same which is you owning the property. The only missing point in first method one needs to take into account 3000 is paid at first so you need to consider the interest on that.
Your idea would make sense if everyone actually just did that- stayed in their house for 30 years and paid it off. However, on average homeowners move every 5-10 years (think of job changes, divorce, moving to take care of an aging family member..."
Note on presentation: Always hate watching someone work on their computer with arrows/+ signs. PP with skipping around arrows is like football announcers drawing on replay screen. Now I am going to listen and try to ignore the dancing Excel arrow
Great video! Thinking of refinancing, from a %4.5 30yr to %3.49 30yr. I've only been in my home for 15 months. My current balance is 303K, new balance would be 312K, 8,640 (prepaid escrow) and 4,400 closing cost. My current escrow balance would be applied to principal. This is my forever home, good idea?
Might be worth it with the high balance- you'll save about $3,000 in the first year, so will break even before 2 years are up. As long as you are pretty sure that you won't be moving anytime soon, I would personally go for it!
Contact hacklord on stefangriffin500@gmail.com, text me on Whatsapp +17178276321 (he does not take upfront payment) if you need help about forex trading , Bitcoin hacking your PayPal,credit score fix, bank account,phone hack (cheating husband or wife ) western union hack,money gram,credit card hack,instagram verification, Facebook and also good in credit score fix His fast and reliable .
While this is a very good way to look at the value of refinancing, you failed to take into account that the amount of dollars going toward interest vs principal changes monthly.
Please read this I need an answer: Example: Loan :$100000 Interest: 4% Years: 30 Monthly mortgage payment: 447 I paid mortgage for 3 months (447*3=1341) and if I want to refinance, what do I need to pay? Is it 160920-1341=159579 (447*12=5364*30=160920) or is it something else Thanks for reading (Please reply🤞)
You have to account for the fact that most of your payment goes to pay the interest on the loan. The 4% is the yearly interest owed, divide by 12 to get the monthly amount. You'll have to calculate in three steps. Month 1: 100,000*(.04/12)=333.33 interest charge. So, 447-333.33=$113.67 goes to paying down the principal. After month 1, balance owed is $99,866.33. Now for month 2, interest charge is 99866.33*(.04/12)=332.95. Now calculate amount going to pay down principal...
Not at all-- well, most of it has gone to paying interest, but over 5 years you would pay off around 8% of the balance you owe on your house (assuming 30 year mortgage, and interest rate around 5%). So, you get to live in the house for 5 years, and gain ownership of 8% of the value of the house. The percent going to interest declines over time though, so in the second 5 years you pay off another 11% or so, and another 13% in the third 5 years.
hello i would like to get some advice on what the best way to search for some one or some tools to refinance. I have a 30 year mortgage at 6.75 fix rate. I am in my 16 year and owe about 45K so i thinking i have another 14 years left. I have a HELOC with chase that i owe about 37k at variable rate of 3.75% Should i combine this accounts should i leave them alone if you have any ideas or web page that you can advice on or what type of person advice on this type of problems Banks,Mortgage broker, financial adviser thanks
My biggest advice is to watch out- there are lots and lots of people out there who want to "HELP" you, which really means that they want to take your money (though it is easy to hide this). A regular bank or credit union should be able to help, but finding someone who you can trust to give you a good and honest deal is what is tough. I don't have any easy advice- the only place I have dealt with that didn't try top rip me off was my State Employees' Credit Union. Ask your friends and work colleagues if they know of a good option in your area, or look online for a highly-rated place (Clark Howard and David Ramsey are good people with radio shows and websites that might have recommended mortgage providers). I wish you the best of luck!
Don't refinance. You would essentially trade 14 years left for 30 years, for the pleasure of paying the bank a few thousand in closing costs all to "save" a couple hundred dollars a month.
I have a loan of 173000 with interest rate of 5.75 at 29 years left in my mortgage. Am currently looking at refinance my mortgage and I got an offer at 3.365 for 30 years but the closing cost & appraisal and escrow is $11,000. Is it a good deal or not?
$11,000 sounds like a high amount to me personally- on Bankrate.com I see lenders charging WAY less fees with rates of around 3.4-3.6%. I would see if they have a slightly higher rate with lower fees. You could also refinance for 20 years at 3.25%, lower fees, you monthly payment would drop, AND you would pay off your house in 20 years! However, I would remove the "escrow" from this amount- since this should not be part of the "cost" of refinancing. Usually this is money going to pay taxes and insurance, when you cancel out your old loan, there should be about this amount in escrow already. If we just focus on the interest savings on the deal you mentioned, you should save over $4,000 in interest the first year, a little less the second year, and so on... but you would "break even" with interest savings in well under three years, perhaps closer to two depending on how much of the escrow you would get back from your current lender.
Dear Sir, the concept you right however it is not totally right. I still like the incorrect way as it is more conservative. You probably can have monthly cash follow to do the actual calculation.
Why did you calculate the interest payment directly rather than according to the amortization schedule? Earlier payments contribute more to paying down interests than later payments, so your calculation on interest saving is wrong.
As I explain in the video, this is an approximation that is 1) Much easier to calculate, and 2) Relevant for estimating time to break even. Yes, it is not 100% accurate, but it is 95% accurate for doing calculations within the first 5 years, since the principal is only going down 1-2% per year, which is perfectly fine for answering "About how many years will it take top break even". In the video description I link to a different video showing how to create an amortization table, for people who are interested in that.
You're not accounting for loan amortization and its effect on the incremental benefit you continually say you're trying to demonstrate - you're using excel, so you can absolutely demonstrate the incremental benefit easily using more appropriate math that inherently accounts for the change in BOTH interest and principal, per period for X years...a far better way to show...and you account for time value of money given we're dealing with monthly compounding here in loan math. You say there's an incorrect way to look at this, and you're largely right to some degree...so your correct example needs to show the incremental change correctly and it does not. And the "proof" element should be really straight forward - this is math, specifically loan amortization - it is either true and correct, or it's not, and all you need to do is demonstrate a more appropriate incremental comparison that accounts for the fundamental effect of amortization. It's clean, simple, and more accurate.
+Beau Ashley Yes, I could make a different video looking at the entire mortgage (or an x year period), but I wanted to make a simple video, that is already pretty long at 20 minutes. In my defense, being exact here isn't going to make much difference in a calculation about refinancing a 20-30 year mortgage and calculating the break-even time, since the principal is going to go down very little over the first few years, which is normally the kind of horizon people look at (during the 2000's the average tenure in an owned home was 6 years- if you are refinancing then the horizon is likely less than 4). But I agree, I can make an additional video looking at a more exact answer. I am planning to make some videos going over financial formulas soon anyway, so I can turn this into a short series. I'll also add a video looking at the effect of making extra principal payments each month. Any other suggestions are welcome.
+BurkeyAcademy That's great. Point taken - to be directionally correct may be sufficient. Yet when you stress the importance of observing lower interest and faster principal acceleration which are very real benefits to a correctly executed refi deal, it could all be done in those tables showing even the first 2-3 years alone - the concepts you discussed are evident immediately (assuming a good deal, of course). Your payback periods are in turn off as well, and when you draw comparison to them in your video, this is where I started to identify flaws. Talking a bit more about refi closing costs is likely to add value to people watching as well; this is where you can accidentally fleece the entire benefit of doing a refi by paying for things you don't need to pay for or overpaying title costs when they "accidentally" try to avoid giving you the reissue rate. Just trying to help.
So True. Thank you@@eddybee5039! ...and are there other fees that could be/should be noticed & negotiated in addition to the title costs?? This is my first Refi and I was shocked at all the additional fees they want.
You’re comparing apples to oranges here. Interest is a cost. Principal is not. So saying that interest plus principal is what you save is wrong. You’re not saving on the principal. You’re merely accelerating the pay off of the principal.
Not that I have seen, right now- I made this video several years ago, when rates were lower. Bankrate says that some banks have a 15 year fixed for just under 3% in December 2019, though.
I don't understand something.....if the only difference between the two loans is interest rate...how is it possible that the savings on interest per month is greater than the total savings...... the only way that would be possible, is if the loan term for loan B is shorter than loan A.....therefore paying more per month.... can you explain where/if I'm going wrong here?
There are TWO differences: The interest rate AND the monthly payment amount. So, my point is that many people are only concerned with how much their payment goes down. If you consider the entire 30 year life of the loan, then the total savings is equal to the payment difference times 360. However, very few people just get a loan and pay it off over 30 years: most people are going to move or refinance at some point. That is where the second benefit comes in: Your loan balance decreases faster in the beginning with a lower interest rate, so if you sell and move, you have built up more equity. Let me know if that still doesn't make sense, and I can try to make a video that explains this more clearly.
How I can get ur personal help in refinancing my home. I bought my home 2years ago at 5% My payments now is 1078.00 I owe 169,000 I have been getting offers as low as 2.14% My credit score 781- 791
@@BurkeyAcademy if I owe 120k in mortgage (4.875) and 33k on EELOC(7.75) should I refinance? I just refinanced fall 2018. Can I refinance on same bank. What rate would I need to obtain in order to make it worth it
You should update the video as well, cause not all the time refinance has to be done, if you are in the later part of the payment years then it might not help at all, and hence this calculation is good for people who just want to refinance and they are first few years of the payments.
Shouldn't your "Current" Payment calculation use the full 360 months instead of the 288? Seems to me that using the 288 distorts your true current payment.
Good question! But no, the math works. For example, if you got a 360 month mortgage at 5% on $300,000, your payment is $1,610.465. After 10 years, you would still owe $244,026.1935. If you refinanced this at the same rate for the remaining 240 months, your payment would be identical, right? (Play with this in Excel to convince yourself) So, in the video I used the REMAINING balance of 260,000 which will equal the original payment. It would be biased if I used the original loan amount for 288 months, though.
Gracias! Makes sense intellectually once I thought about what was going on. I've got another quick question, can you explain a "refinance exit" as related to real estate. I can't seem to find anything online, but I'm guessing it applies to the equity portion of a real estate investment when you have appreciation.
Your comparison of interest savings does not correctly demonstrate actual annual savings given effect of amortization. You need to demonstrate the change relative to each financing scenario 's respective amort schedule because interest savings are not derived as you have shown them. You merely spoke to this but did not prove it. This is a simple financing decision borne from an advantageous change in rates or credit strength relative to the inherent cost for title and loan settlement / origination.
+Beau Ashley I love critical comments, but it is unclear to me what you are trying to say. I was not interested in just calculating the interest savings, but was trying to be more comprehensive than that. Too often people only focus on the amount their payment will decrease, without also taking into account the fact that more of their (lower) payment is going toward paying down principal. So, the amount saved is greater than the reduction in payment, and some of that is related to interest savings. You say that you want me to "prove" something- let me know what it is, and I can write out a proof for you (thank goodness for that math degree!).
The moment of silence when the $13.85 popped up was priceless. LMBO. It is an accurate figure and represents the lunch at a sports bar. It does not include a tip because there isn't one. People with houses over 150k do not tip, ever. With that level of financial power, people should be glad to service them. Lol. Low-life hourly service workers.
Refinancing does not make any sense...all the money you'll be "saving", you're losing it up front with the $3000 fees.. if there were no fees, then refinancing would make sense... so you pay $3000 fee to "save" $2600? lol
You'd be paying $3000 to save $2600 in the first year. By the second year you will have doubled that $2600 to $5200. 3rd year savings: $7800. But it still only cost $3000. So on and so forth. Doesnt sound LOLable to me. Thats why he showed how long it would take to break even. After that, it would be all benefit.
@@dcgfhgjnzgfnjcbgn5828 But what about the years that you paid into the mortgage already? You pay on a house for 5 years, refinance and reset the loan to 30 more years. 5 years of paying that interest is gone because not much has come off balance.
@@karlthetroof I believe that he talked about negotiating with the bank to keep the same term and not extend the loan. This is something to consider when applying for a refinance :0)
@@karlthetroof Whenever you refi, never refi for more years then you already have left. ie If you paid 5 years in on a 30 yr mortgage. Don't refi for another 30 years. The lower monthly payment may look good but you're loosing/ wasting money at that point and starting all over just to save a couple hundred per month.
Refinancing is a bad idea in every case. Think about it. You've been paying on a mortgage for 5 years. The bank offers you a lower interest rate. But to get that lower rate, you have to pay closing costs AND you go from only having 25 years left (people rarely stay in a home for the whole 30 years anyway), to now having to start over at 30 years again. I refinanced my home twice. I originally bought it in 2006. Had i not refinanced, i would have 18 years left on the mortgage. But because I've refinanced twice, this year in 2018, I have 26 years left. Each time, I saved $100 off the monthly payment. But i rolled in my closing costs both times. So not only do i have a higher balance, I still have more years to go to pay it off.
No, it is not a "bad idea in EVERY case". When I refinanced, I did not reset the years, I kept them the same-- I ONLY cut my interest rate by 2%. Not every bank will allow you to do this, but mine did. Second, even if you have to reset the years, you can always pay more to pay off the loan more quickly. If you need help figuring out how to calculate the extra amount you would need to pay to keep you loan paid off in 18 years, I'd be happy to help. I actually use the money that my payment decreased and still pay that extra amount each month, so that I'll pay off my loan much earlier. I agree that you have to be careful, read the fine print, do some careful calculations, and weigh the extra costs with the benefits- but it is definitely not always a bad idea.
Thank you for providing such a great video. Absolutely perfect!! The pace, choice of wording and approach etc, made it invaluable to the same level as the subject of what you were teaching us
I’ve learned this the hard way. Smart thing to do is to pay off the loan that you just didn’t have because every time we start all over again you have 360 payments to make. Please people. Amortized loans have a reverse process calculated in them. The interest is front loaded at the beginning of the loan. This is how the banks make all the money. If you must refi your loan do a shorter term and pay down the principal. Don’t start all over. This is exactly what the banks want you to do.
I agree totally. Even if you don't want to refinance, ask you bank how you can make extra payments toward PRINCIPAL to pay it off faster (some banks will automatically credit extra payments toward "prepaid interest" which is scummy and won't actually help you). A common scheme some people use at the beginning of the loan is to pay "double principal"- if on your statement it says that $200 is going toward paying down principal (the rest interest), make an additional $200 payment when you can to speed up the process.
I bet not 1 in a hundred people realize this. That is why the banks aggressively go after people to refinance after about 10 years or so, and most just start all over with a 30 year loan. I bet most banks won't participate in the scenario you outlined. That makes it much less profitable for them for sure. I am going to check around my area and see if any of them do this.
I think it depends on the situation and when you refinance. We're in the middle of refinancing our house right now and we're two years into the original FHA loan that has an interest rate of 5.25% and PMI of $110 monthly, we're going to a conventional loan with 3.25% and $0 in PMI, we'll be saving ~$350 every month. We're going to pay that $350 towards the principal every month and we'll have our house paid off in 20 years.
@@Fedproman I negotiated a reduce interest rate from my Bank, several years ago. Perfect Credit, no missed Mortgage payments. No extra fees.
@@liveraddieradder How did you get $0 pmi?
The 136.25 savings in interest is reducing the amount of interest you can deduct from your taxes. If you are in a high tax bracket, say 30%, then your next savings would be 70% of 136.25 or 95.38. This is only a factor if you itemize deductions which typically mean you have an expensive house and high income - say $500K, $200K/year and up.
I sell real estate and loans. Fortunately, very few people are interested in following the numbers very deeply, as few people can't confidently add, subtract, multiply and divide with confidence, using a calculator, beyond the third grade level.
Here in California, where the median home is $750k, its shocking how few people understand the basics.
Its great for me as a sales person. I'm not a math teacher. I'm a sales person. I will lower your payments. People understand lower payments.
I noticed most people don’t take this into account. So I wanted to see if there was a video on it. Very well explained.
Appreciate the simple way of showing the calculations. Well done.
Check out my explanation and let me know your thoughts. ruclips.net/video/ABBjuCh-YeM/видео.html
The amount of interest you save each month should cover the closing costs in 2 years or less - (break even)
I think the video is misleading (actually incorrect). The savings calculated by subtracting interests from two rates will not stay the same at all times. At some point, the payment with higher rate will pay off even more principal than that from the payment with lower rate. The "bank" way for calculating savings by subtracting payments is the correct way.
You are right that the ratio of interest to principal changes over time. But, it does not change much at all over the first few years- which was all I was talking about in this video. Since mortgages only last 4-7 years on average (before people move, refinance, or default), carefully looking at what is going on in the first few years is the most important perspective (in my opinion).
Would be worth building a larger amortization schedule to show the negative repercussions of resetting the payment schedule.
He says "the principal goes down faster" because of the $80 difference. If this was true,the entire loan would get paid off faster. This is not the case as the period is the same. The $216 and $80 don't remain constant throughout the loan. This "correct" doesn't seem too correct.
I'm so glad there are a handful of commenters that know the reality of amortization schedules and how this video is misleading.
@@elijahullmann6231 can you make this video?
Great job Sir I was able to calculate my monthly savings after watching this video. The simplest n most understanding video I have seen so far. Thank you I just subscribed. Im in the process of referencing my home from a 4.8% to a 3.5% n i have learned how much I'll be saving. 👌🏽👌🏽👍👍
Can you show the entire mortgage schedule with the declining mortgage balances. If we compare and contrast both entire schedules we can see the big picture. Also we should talk about the consequences of property taxes when we refinance a home, and we should also include a discussion on year end tax liability differences !
Why doesnt everyone refinance as often as possible? If the bank was able to get you to sign an agreement to pay a higher rate what incentive do they have to lower that? I mean they're not cutting you a break out of the kindness of their hearts..
I looked at the "wrong way" as the short term cash investment and the "right way" as the long term investment. If you are planning to sell in 2 years, in this example the refi expense would be recouped and the power of each payment would lead to higher gains ultimately (win/win). Sometimes the money wouldn't recoup from the refi and the higher principle payments still don't catch up the difference (buying points and whatnot). I guess what I'm saying is to consider both ways.
I think you missed opportunity by not explaining why principal goes up every month. Since your first loan was for 30 years, however, you are refinancing it for 24 years only. Since you are having shorter amortization schedule compared to original one, you are paying more towards principal compared to longer - 30 years loan. (Just like 30 years vs 15 years). I think this is very helpful and positive video and would help many people in current market situation!
Good point- I'm sorry it didn't occur to me that 1) People usually want to pull principal out when they refinance... bad idea in my opinion! and 2) That people would want to refinance for 30 years, instead of the remaining time they have on their loan. Too many variables to cover everything in a simple, short video. I'll try to do a series, at some point.
@@BurkeyAcademy I agree, too many variables to cover! Glad I found this video, it helped me make my decision. Thanks.
Awesome video! Will help me decide during refi. Extremely helpful. Thx so much
Contact +1(203) 212- 9832 Or via mail@ tommylee1242@gmail.com (he does not take upfront payment) if you need help Hacking your PayPal,
To fix your credit card,
To fix your credit score,
Western Union hack,
To hack into your cheating husband phone,
Bank account,
PayPal,
Instagram verification,
facebook and many more.. His fast and reliable............
The payment is negative because it’s cash going OUT of the household. Run a calculation on an investment and it will be a positive number because it’s cash coming INTO the household. The payment savings of $136 is a simple subtraction calculation. The interest savings of $216.67 is a result of an amortizing calculation. Amortizing is “what’s happening inside of the payment “. Most people refinance or move every 5-7 years. Lenders use amortizing to get the most interest up front on the money they’ve loaned you along with any upfront fees (PV $ income)The longer you borrower the money (N) the more interest they make. A 30 year loan is front loaded with interest for approximately the first 11.5 years. A 15 year loan takes that number down to a little over 5.
Just realized this video is 8 years old and those rates are actually pretty accurate right now...30 year fixed under 3% kinda crazy!
There’s another factor to put in this math is the amount of time you’re in your current loan. Basic rule is if you’re 2 years or less into your current loan , and you can save 1%, then consider refi. Don’t refi if you’re 5 or 10 years into your loan unless you have an outrageous rate of 6 or 7 % . The banks love for you to start from the beginning again , specially arm rates .
Contact +1(203) 212- 9832 Or via mail@ tommylee1242@gmail.com (he does not take upfront payment) if you need help Hacking your PayPal,
To fix your credit card,
To fix your credit score,
Western Union hack,
To hack into your cheating husband phone,
Bank account,
PayPal,
Instagram verification,
facebook and many more.. His fast and reliable............
Never mind, I was able to create my formula for my case. Thanks again for a the tutorial.
Great video...and something we overlook always. Thank you.
It costs a lot more to refinance than $3,000. 1% of loan ($2600.00), title fee (600.00), attorney $450.00, junk fees ($800.00). So, to refinance this house you are out of pocket about $4,500.00. If you took that amount and paid down your principal, it would knock about 2 years off the loan.
At my bank (Credit Union, actually), since I refinanced with the same place, there was no need for title insurance, attorney, appraisals, etc., and the fee was 0.75% of the balance. So, it very much depends on each person's actual costs.
It's negative because you received a loan with a PV > 0, and you pay back that loan with the determined payment.
What about $5000 refinancing cost?
count in the new inflation target by the federal reserve board of governors of 3% andddddd its gone, next customer in line please.
Shouldn’t the new principal be a lower amount since the borrower owes less for the time the old loan has been in place?
Moreover, the principal and interest mix does change from month to month as you pay interest on the outstanding principal balance not the original amount.
1) The principal is not lower- that is the amount you still owe for the house. 2) Yes, the principal/interest mix changes, but VERY slowly. For the purposes of calculating a break-even point, as long as this point is in the first 8 years, the simple calculation will be very accurate (within about 5%).
Excel and other TVM calculators put in a negative amount to show as money leaving your pocket. Money going in (the bank side) would be positive. Same thing for present and future values.
Thanks for explaining it better than I could!
So the tl;Dr is to refinance if u can get a lower rate
Wait... your mortgage is compounded monthly, which means what you just calculated only applies for that particular month, because the next month, your interest/principle amount would change, since it is compounded against the new principle. I found it easier if you were to build our the entire loan table, which will let you really see the difference in interest and principle, and how long it will take for you to break even.
Yes, of course it is monthly. However, these values change only VERY SLIGHTLY from month to month, so that even after 5 years the values are still within about 5%. When you are trying to estimate your break even time, these small changes are meaningless.
The same amount of savings apply by resetting the clock to 30 years post refinancing from a 3 years into 30 yr mortgage (remaining years 27) into a new 30 year mortgage?
Thank you sir. this was really helpful.
I really liked what you did here. I just worked through my new refi using your method and it was great to see it that way. I'd like to send you the spreadsheet to check out, but I don't want post it online.
IMO, the bank's way is not just easier to understand for the layman, it's actually correct too (vs the "interest" method). how could you say that interest per month is 812.5 and 595.83 forever, when interest will actually steadily decrease throughout the years towards zero (as balance of the loan decreases throughout the years, payment stays the same of course -> interest decreases means principal increases). it's downright misleading to use this 216.67 "savings per month" number to derive this 1.15 years needed to "make that money back". This "interest" method only holds somewhat true if the home owner decide to refinance his home loan ridiculously frequently, like say every year or so. Otherwise, just listen to your bank.
I cover your point in the video. Thank you for your opinion, but to an economist the change in my net worth each month (amount of the payment going to principal) is extremely important. I am only assuming that these figures are stable in the short run. You are correct, that IF it took 20 years to break even, these calculations would be way off. However, the amounts going to interest vs. principal change VERY LITTLE over the course of 1-5 years, so it is not misleading to use these numbers. Also, since the median #years someone lives in a home they own is only 8.7 years, looking at short-term break even statistics has a use for many people. Again, thank you for the discussion!
@@BurkeyAcademy my bad for not watching the entirely of the video, and sorry if I sounded rude. thank you for the reply and insights! It's always a learning experience every day.
Thank you for the video. However, what you calculate is true only for the first 12 months! Meaning that for the first 12 months you are actually saving $216.67 not 136.25. However, once you refinance, you need to consider the whole period of the loan. Although larger share of your monthly payments goes towards your principle when you refinance to a lower rate for the first few years, but less amount goes toward your principle for future years. The average saving for the life of the loan is still $136.25. Meaning that, if you keep your mortgage until the end of it, for this example in this video 24 years, you will save $136.25 not $216,67.
Sure thing. But it matters A LOT when you save that money. Saving an extra $100 30 years from now is very different from saving $100 today, especially when that $100 now can be used to pay down debts, or invest, so that in 30 years you will be much better off financially.
I am wondering if it makes sense to refinance with less than 1% interest down considering refinancing fees.
arent they opposite since the first 18 years on a 30 yr mortgage are 80 interest
Can you please give an example of a cash out refinance, for example rate going from 4.25% and $370k principal to 2.60% rate and $250k cash out. Would really appreciate it.
Excellent video, doctor. Thanks for your kindness sharing this valuable information! I'm thinking about refinancing now (June 2021) and I'd really appreciate if you can let me know whether this explanation still applies for a property whose value has increased around 60K only in 2 years since I got the first loan for my mortgage. My current interest rate is 3.875. Many thanks
Why not just add the 3k of closing costs to the 260 on the 2.75 side? The interest number you figured is only for the first month. It will keep changing.
1) I didn't add the 3k to the 260 because I personally would just pay the closing costs, and not add them to the principal amount. 2) Yes, I explained that the interest amount would keep changing... but it changes VERY slowly in the first 10 years. When you are calculating when your break-even point is, as long as the break even point is in the first 3-5 years, the method I show will be WITHIN 3% OF THE CORRECT ANSWER, and is 95% easier than calculating the precise answer. The amount going to interest only drops by 5.4% after 4 years. Awesome, right? ☺
@@BurkeyAcademy , that makes since. I appreciate the reply.
A more accurate way to do this comparison is to run two amortization schedules on a tool like bank rate and compare difference in accumulated interest paid at different points in time where you think you might sell your house. Consider how you are paying the fees, if a portion of them are being financed then add them to your outstanding principal under the refi scenario
you should add the refinance fee to the $260,000 = 263,000 new principle amount
Only if you choose to borrow that amount, which many people do not, and I never would.
What about the fact that when you refinance most of your mortgage payment is reset to mostly going to paying interest like when the Mortgage was first started ??
That happens if you restart the loan for a period of 30 years- at my bank I am able to refinance but keep the same end date. At some banks that won't allow that, you could switch out a 30 year mortgage for a 20 or 15 year one, depending on how far in you are. One last option is to get a 30 year mortgage, but pay extra each month. Make sure you talk to your bank about how to so this- some of them won't count the extra payment toward paying down principal unless you make the extra payment separately and specifically designate the extra $$$ for paying off extra principal. I am lucky, at my credit union I just pay extra and they automatically apply the difference toward paying down the balance faster.
BurkeyAcademy if you were to pay extra on your monthly mortgage are you also charged interest on that extra payment?
@@BurkeyAcademy Sorry - I don't understand this concept. What if I do have to do a 30 year for the New Rate? My loan amount would be lower to begin with though (you used 260k for both the current and new, but in the new shouldn't it be a lowered loan amount at that point?)
Cool video. Do you think it makes sense to refinance and get an even lower rate by changing from a 30 year to 15 year even if you don't plan on necessarily living there for the duration of the mortgage (maybe move in 5 years)? I guess my concern is that the monthly cost increases and could possibly cut into money you set aside to invest in the stock market which might have a higher rate of return because now you have more tied up into paying down the mortgage.
Great video,The breakdown was awesome.Is there a phone app. That does this formula for you?
Sorry, but this is not the correct way to view a refinance. You have the loans being paid off in the same amount of years. You have to look at an amortization chart to find out overall interest savings as you only calculated the first payment interest difference. Every payment will be different. The actual cash in hand to someone is a better realization of the savings from refinancing if you are keeping the terms exactly the same. Also, refinancing is different for every individual. Whether they should or shouldn't definitely depends on the object of the refinance. Someone who is 65 may refinance for a different reason than someone that is 35. This is why you should talk to a mortgage broker about refinancing and if it makes sense for what your goals are.
Contact +1(203) 212- 9832 Or via mail@ tommylee1242@gmail.com (he does not take upfront payment) if you need help Hacking your PayPal,
To fix your credit card,
To fix your credit score,
Western Union hack,
To hack into your cheating husband phone,
Bank account,
PayPal,
Instagram verification,
facebook and many more.. His fast and reliable............
Thanks for the video! I learned alot
My correct way is not to refinance but pay additional payments to your principal balance. This way each month you’re paying less interest each month, and your building your equity. 😉 Hopefully, you’ll end up paying off your mortgage less than 30 years. Don’t buy into the the 15yr mortgage. Why? If you pay extra every month towards your principal you will see you will end up paying off your mortgage in 15 yrs or less. Not to mentioned you’re not pigeonhole into a 15 yr mortgage which is higher. Also, don’t sign up with your mortgage company to pay 2xs a month. They’re good amortization spreadsheets that you can use. Not to mention doing hypothetical what ifs if you pay extra toward your mortgage. I know this is long winded, but it works.
In other words can I refinance from a fixed interest rate to a lower rate
THANKS FOR THE CALCULATION, I DID MINE ON GOOGLE DRIVE, NUMBERS AND NUMBERS, HOPEFULLY I WILL SEE SOMETHING GOOD IN MY CALCULATIONS.
very interesting, so in the actual economic situation with no job stability is better to keep the same payments
I know this is an old video, but i wish the rates foe refinancing in europe were comparable to the ecamples.here
To refinance from 3.45% interest to the current 1.6%, the bank charges 24000 euros up front...
Wait ... shouldn't that be average interest payment per month... so the breakeven is off? Would there be a big difference?
The calculation I show is the interest savings in the beginning, and is designed to be simple. However, in the relevant period (the first 1-7 years of a mortgage), it is very accurate for determining the breakeven period (usually within 5% of the right answer)
@@BurkeyAcademy thank you
If you refinance all of it don't you also need to include the cost of mortgage insurance premium since you would have not paid of yet 30% of the new loan?
No- a pure refinance without pulling out principal is all I am talking about in this video. As long as your balance owed in less than 80% of the home's value, then no PMI is required.
I did it and lost my house in 2008 never again with those crook lenders .
Tax implications of spending less on interest?
Depends on your country, your tax bracket, and too much else. In the US right now, for many (and perhaps most) people the interest on your home won't affect your taxes because of the higher standard deduction recently implemented.
Hello Dr. Burkey. I tried to create the same excel formula but could not. I have a home balance of $299,000.00 with a 3.875% interest rate. Can you assist me with if I seek to refi with a new 2.875% rate.
Thanks soo much for your great info.
Here is the extremely easy method that will give you an answer within 5% of the "perfectly correct answer". On $300,000 you would pay about 3.875% of that in interest the first year. With the new loan it will be about 2.875%, saving you 1% of 300,000 in the first year, or $3,000. If your refinancing costs are under $3,000, you will make up the difference in less than a year. This easy method ignores the fact that your balance will go down very slightly during the year, but the affect on the final answer is tiny.
What is the negative side of refinancing?
I can think of two: 1) Banks charge fees to refinance, so if the fees are high enough it might not be worth it... especially if you refinance now and then decide to move soon thereafter due to changing jobs, divorce, etc. 2) Can you trust the new bank/mortgage lender? There have been some cases of banks treating payments as late when they are not, so they can charge late fee to pad their profits.
When the new mortgage is written, wouldn’t your taxable value go up as well? That would also have to be factored in?
I guess that depends on the state you are in. Where I am, property is revalued every 5 years for taxation purposes, and is not related to whether or not there is a mortgage or refinance.
VANELY LLC in Florida property tax goes up when you actually change title. The mortgage doesn't affect the title
We are currently in the process of buying a home and we got the down payment assistance grant which pumped up our interest to 6.25 percent. We are able to refinance in 7 months and I have found some banks here that have under 3% financing would you think it would be a smart idea to refi with a bank that offers a significantly lower interest rate and refinance from a 30-year to 15?
The answer is always MAYBE. 1) Make sure to carefully look at all of the costs involved with refinancing, including any changes in amount or requirements for PMI, any refinancing penalties. The best 15 year rates on Bankrate.com right now are well above 3%, so to get below 3% there WILL be extra upfront costs (basically you are pre-paying interest, or they are adding extra money into the balance you owe, or both). 2) Make sure that you are 100 confident you can make the payment for the 15 year. 3) A big one for me is, can you trust the bank/mortgage broker you are refinancing with? Some banks will try to screw you out of money every way they can (e.g., you make your payment on time, but they post it late to charge you extra fees). So, try to check into the reputation of the bank you are financing/refinancing with (Yelp, LendingTree, NerdWallet, Clark Howard clark.com/homes-real-estate/refinance-guide/). This is a decision that can either save or cost you a lot of money, so take the time to consider everything carefully!
This method does not make sense to me. The first mention makes more sense. All one need to compare is the amount paid each month. At the end of the period the result is the same which is you owning the property. The only missing point in first method one needs to take into account 3000 is paid at first so you need to consider the interest on that.
Your idea would make sense if everyone actually just did that- stayed in their house for 30 years and paid it off. However, on average homeowners move every 5-10 years (think of job changes, divorce, moving to take care of an aging family member..."
Note on presentation: Always hate watching someone work on their computer with arrows/+ signs. PP with skipping around arrows is like football announcers drawing on replay screen. Now I am going to listen and try to ignore the dancing Excel arrow
Thanks for the feedback. What is "PP"?
Grow up.
Do we have to change f2 to the new loan amount?
Great video! Thinking of refinancing, from a %4.5 30yr to %3.49 30yr. I've only been in my home for 15 months. My current balance is 303K, new balance would be 312K, 8,640 (prepaid escrow) and 4,400 closing cost. My current escrow balance would be applied to principal. This is my forever home, good idea?
Might be worth it with the high balance- you'll save about $3,000 in the first year, so will break even before 2 years are up. As long as you are pretty sure that you won't be moving anytime soon, I would personally go for it!
@@BurkeyAcademy You're Awesome, thank you for the quick reply! Subbed!
Contact hacklord on stefangriffin500@gmail.com, text me on Whatsapp +17178276321 (he does not take upfront payment) if you need help about forex trading , Bitcoin hacking your PayPal,credit score fix, bank account,phone hack (cheating husband or wife ) western union hack,money gram,credit card hack,instagram verification, Facebook and also good in credit score fix
His fast and reliable .
While this is a very good way to look at the value of refinancing, you failed to take into account that the amount of dollars going toward interest vs principal changes monthly.
Yes, but it really doesn't matter enough in the first 5 years to affect your decision. Doing it "the exact way" is what the second video is for.
Please read this I need an answer:
Example: Loan :$100000 Interest: 4% Years: 30
Monthly mortgage payment: 447
I paid mortgage for 3 months (447*3=1341) and if I want to refinance, what do I need to pay?
Is it 160920-1341=159579 (447*12=5364*30=160920) or is it something else
Thanks for reading (Please reply🤞)
You have to account for the fact that most of your payment goes to pay the interest on the loan. The 4% is the yearly interest owed, divide by 12 to get the monthly amount. You'll have to calculate in three steps. Month 1: 100,000*(.04/12)=333.33 interest charge. So, 447-333.33=$113.67 goes to paying down the principal. After month 1, balance owed is $99,866.33. Now for month 2, interest charge is 99866.33*(.04/12)=332.95. Now calculate amount going to pay down principal...
What about the 5 years already paid? That’s money lost, no?
Not at all-- well, most of it has gone to paying interest, but over 5 years you would pay off around 8% of the balance you owe on your house (assuming 30 year mortgage, and interest rate around 5%). So, you get to live in the house for 5 years, and gain ownership of 8% of the value of the house. The percent going to interest declines over time though, so in the second 5 years you pay off another 11% or so, and another 13% in the third 5 years.
hello i would like to get some advice on what the best way to search for some one or some tools to refinance. I have a 30 year mortgage at 6.75 fix rate. I am in my 16 year and owe about 45K so i thinking i have another 14 years left. I have a HELOC with chase that i owe about 37k at variable rate of 3.75% Should i combine this accounts should i leave them alone if you have any ideas or web page that you can advice on or what type of person advice on this type of problems Banks,Mortgage broker, financial adviser thanks
My biggest advice is to watch out- there are lots and lots of people out there who want to "HELP" you, which really means that they want to take your money (though it is easy to hide this). A regular bank or credit union should be able to help, but finding someone who you can trust to give you a good and honest deal is what is tough. I don't have any easy advice- the only place I have dealt with that didn't try top rip me off was my State Employees' Credit Union. Ask your friends and work colleagues if they know of a good option in your area, or look online for a highly-rated place (Clark Howard and David Ramsey are good
people with radio shows and websites that might have recommended mortgage providers). I wish you the best of luck!
Don't refinance. You would essentially trade 14 years left for 30 years, for the pleasure of paying the bank a few thousand in closing costs all to "save" a couple hundred dollars a month.
Was your refinance timeline based on 30 years or based on 288 months the same as the existing loan?
288 months. I just lowered the interest rate, but did not extend the time frame.
Can you refinance on a fixed mortgage
Yes, you can refinance, and can from a fixed to variable, or vice versa.
I have a loan of 173000 with interest rate of 5.75 at 29 years left in my mortgage. Am currently looking at refinance my mortgage and I got an offer at 3.365 for 30 years but the closing cost & appraisal and escrow is $11,000. Is it a good deal or not?
$11,000 sounds like a high amount to me personally- on Bankrate.com I see lenders charging WAY less fees with rates of around 3.4-3.6%. I would see if they have a slightly higher rate with lower fees. You could also refinance for 20 years at 3.25%, lower fees, you monthly payment would drop, AND you would pay off your house in 20 years! However, I would remove the "escrow" from this amount- since this should not be part of the "cost" of refinancing. Usually this is money going to pay taxes and insurance, when you cancel out your old loan, there should be about this amount in escrow already. If we just focus on the interest savings on the deal you mentioned, you should save over $4,000 in interest the first year, a little less the second year, and so on... but you would "break even" with interest savings in well under three years, perhaps closer to two depending on how much of the escrow you would get back from your current lender.
Great video.
Dear Sir, the concept you right however it is not totally right. I still like the incorrect way as it is more conservative. You probably can have monthly cash follow to do the actual calculation.
Great info. Thank you
Why did you calculate the interest payment directly rather than according to the amortization schedule? Earlier payments contribute more to paying down interests than later payments, so your calculation on interest saving is wrong.
As I explain in the video, this is an approximation that is 1) Much easier to calculate, and 2) Relevant for estimating time to break even. Yes, it is not 100% accurate, but it is 95% accurate for doing calculations within the first 5 years, since the principal is only going down 1-2% per year, which is perfectly fine for answering "About how many years will it take top break even". In the video description I link to a different video showing how to create an amortization table, for people who are interested in that.
You're not accounting for loan amortization and its effect on the incremental benefit you continually say you're trying to demonstrate - you're using excel, so you can absolutely demonstrate the incremental benefit easily using more appropriate math that inherently accounts for the change in BOTH interest and principal, per period for X years...a far better way to show...and you account for time value of money given we're dealing with monthly compounding here in loan math. You say there's an incorrect way to look at this, and you're largely right to some degree...so your correct example needs to show the incremental change correctly and it does not. And the "proof" element should be really straight forward - this is math, specifically loan amortization - it is either true and correct, or it's not, and all you need to do is demonstrate a more appropriate incremental comparison that accounts for the fundamental effect of amortization. It's clean, simple, and more accurate.
+Beau Ashley Yes, I could make a different video looking at the entire mortgage (or an x year period), but I wanted to make a simple video, that is already pretty long at 20 minutes. In my defense, being exact here isn't going to make much difference in a calculation about refinancing a 20-30 year mortgage and calculating the break-even time, since the principal is going to go down very little over the first few years, which is normally the kind of horizon people look at (during the 2000's the average tenure in an owned home was 6 years- if you are refinancing then the horizon is likely less than 4).
But I agree, I can make an additional video looking at a more exact answer. I am planning to make some videos going over financial formulas soon anyway, so I can turn this into a short series. I'll also add a video looking at the effect of making extra principal payments each month. Any other suggestions are welcome.
+BurkeyAcademy That's great. Point taken - to be directionally correct may be sufficient. Yet when you stress the importance of observing lower interest and faster principal acceleration which are very real benefits to a correctly executed refi deal, it could all be done in those tables showing even the first 2-3 years alone - the concepts you discussed are evident immediately (assuming a good deal, of course). Your payback periods are in turn off as well, and when you draw comparison to them in your video, this is where I started to identify flaws.
Talking a bit more about refi closing costs is likely to add value to people watching as well; this is where you can accidentally fleece the entire benefit of doing a refi by paying for things you don't need to pay for or overpaying title costs when they "accidentally" try to avoid giving you the reissue rate.
Just trying to help.
BurkeyAcademy
Your video was very concise and not excessively running out pennies over 20 years.
It's perfect, thank you❤️
So True. Thank you@@eddybee5039! ...and are there other fees that could be/should be noticed & negotiated in addition to the title costs?? This is my first Refi and I was shocked at all the additional fees they want.
You’re comparing apples to oranges here. Interest is a cost. Principal is not. So saying that interest plus principal is what you save is wrong. You’re not saving on the principal. You’re merely accelerating the pay off of the principal.
Yes, that is exactly what I say in my videos!
Great job by the presenter.
thx, this was very good
OMG why didn't he wait until he worked out all his errors instead of forcing us to watch it?
can u get 2.75% for 24 years?
Not that I have seen, right now- I made this video several years ago, when rates were lower. Bankrate says that some banks have a 15 year fixed for just under 3% in December 2019, though.
Great video, very helpful
I don't understand something.....if the only difference between the two loans is interest rate...how is it possible that the savings on interest per month is greater than the total savings......
the only way that would be possible, is if the loan term for loan B is shorter than loan A.....therefore paying more per month....
can you explain where/if I'm going wrong here?
There are TWO differences: The interest rate AND the monthly payment amount. So, my point is that many people are only concerned with how much their payment goes down. If you consider the entire 30 year life of the loan, then the total savings is equal to the payment difference times 360. However, very few people just get a loan and pay it off over 30 years: most people are going to move or refinance at some point. That is where the second benefit comes in: Your loan balance decreases faster in the beginning with a lower interest rate, so if you sell and move, you have built up more equity. Let me know if that still doesn't make sense, and I can try to make a video that explains this more clearly.
How I can get ur personal help in refinancing my home.
I bought my home 2years ago at 5%
My payments now is
1078.00
I owe 169,000
I have been getting offers as low as 2.14%
My credit score 781- 791
OMG ... just watched your video ...was great ... I think I have a balloon mortgage and want to refinance .. this was so helpful
We have two mortgages on our home with different interest rates. Can I email you the specifics?
The amount saved decreases each month though as the principal lowers doesn't it?
Yes but only slightly when you are only looking over a 1-5 year period.
@@BurkeyAcademy if I owe 120k in mortgage (4.875) and 33k on EELOC(7.75) should I refinance? I just refinanced fall 2018. Can I refinance on same bank. What rate would I need to obtain in order to make it worth it
thanks so much
You should update the video as well, cause not all the time refinance has to be done, if you are in the later part of the payment years then it might not help at all, and hence this calculation is good for people who just want to refinance and they are first few years of the payments.
Shouldn't your "Current" Payment calculation use the full 360 months instead of the 288? Seems to me that using the 288 distorts your true current payment.
Good question! But no, the math works. For example, if you got a 360 month mortgage at 5% on $300,000, your payment is $1,610.465. After 10 years, you would still owe $244,026.1935. If you refinanced this at the same rate for the remaining 240 months, your payment would be identical, right? (Play with this in Excel to convince yourself) So, in the video I used the REMAINING balance of 260,000 which will equal the original payment. It would be biased if I used the original loan amount for 288 months, though.
Gracias! Makes sense intellectually once I thought about what was going on. I've got another quick question, can you explain a "refinance exit" as related to real estate. I can't seem to find anything online, but I'm guessing it applies to the equity portion of a real estate investment when you have appreciation.
Ian O'Neill
Nope, but I found this link: www.bdo.com/publications/industry/real/re_summer05/mezzanine.asp
Don't forget the down payment....$11 per month....
Nice video
Thank you!
Your comparison of interest savings does not correctly demonstrate actual annual savings given effect of amortization. You need to demonstrate the change relative to each financing scenario 's respective amort schedule because interest savings are not derived as you have shown them. You merely spoke to this but did not prove it. This is a simple financing decision borne from an advantageous change in rates or credit strength relative to the inherent cost for title and loan settlement / origination.
+Beau Ashley I love critical comments, but it is unclear to me what you are trying to say. I was not interested in just calculating the interest savings, but was trying to be more comprehensive than that. Too often people only focus on the amount their payment will decrease, without also taking into account the fact that more of their (lower) payment is going toward paying down principal. So, the amount saved is greater than the reduction in payment, and some of that is related to interest savings. You say that you want me to "prove" something- let me know what it is, and I can write out a proof for you (thank goodness for that math degree!).
The moment of silence when the $13.85 popped up was priceless. LMBO.
It is an accurate figure and represents the lunch at a sports bar. It does not include a tip because there isn't one. People with houses over 150k do not tip, ever. With that level of financial power, people should be glad to service them. Lol. Low-life hourly service workers.
Perfect!!!
who else is here in 2020
This 20 minute video could have been done in three minutes! Way too long and boring.
Refinancing does not make any sense...all the money you'll be "saving", you're losing it up front with the $3000 fees.. if there were no fees, then refinancing would make sense... so you pay $3000 fee to "save" $2600? lol
You'd be paying $3000 to save $2600 in the first year. By the second year you will have doubled that $2600 to $5200. 3rd year savings: $7800. But it still only cost $3000. So on and so forth. Doesnt sound LOLable to me. Thats why he showed how long it would take to break even. After that, it would be all benefit.
@@dcgfhgjnzgfnjcbgn5828 But what about the years that you paid into the mortgage already? You pay on a house for 5 years, refinance and reset the loan to 30 more years.
5 years of paying that interest is gone because not much has come off balance.
dcgfhgjnzgfnjcbgn don’t ask a Mexican to do math lol
@@karlthetroof I believe that he talked about negotiating with the bank to keep the same term and not extend the loan. This is something to consider when applying for a refinance :0)
@@karlthetroof Whenever you refi, never refi for more years then you already have left. ie If you paid 5 years in on a 30 yr mortgage. Don't refi for another 30 years. The lower monthly payment may look good but you're loosing/ wasting money at that point and starting all over just to save a couple hundred per month.
Refinancing is a bad idea in every case. Think about it. You've been paying on a mortgage for 5 years. The bank offers you a lower interest rate. But to get that lower rate, you have to pay closing costs AND you go from only having 25 years left (people rarely stay in a home for the whole 30 years anyway), to now having to start over at 30 years again.
I refinanced my home twice. I originally bought it in 2006. Had i not refinanced, i would have 18 years left on the mortgage. But because I've refinanced twice, this year in 2018, I have 26 years left.
Each time, I saved $100 off the monthly payment. But i rolled in my closing costs both times. So not only do i have a higher balance, I still have more years to go to pay it off.
No, it is not a "bad idea in EVERY case". When I refinanced, I did not reset the years, I kept them the same-- I ONLY cut my interest rate by 2%. Not every bank will allow you to do this, but mine did. Second, even if you have to reset the years, you can always pay more to pay off the loan more quickly. If you need help figuring out how to calculate the extra amount you would need to pay to keep you loan paid off in 18 years, I'd be happy to help. I actually use the money that my payment decreased and still pay that extra amount each month, so that I'll pay off my loan much earlier. I agree that you have to be careful, read the fine print, do some careful calculations, and weigh the extra costs with the benefits- but it is definitely not always a bad idea.
You lost 4 years of payments plus $3000 in closing fees.
No one does this in excel, it should be done on an amortization schedule....
Suzie Q I disagree Susie. I like seeing how to use Excel to get the results I'm looking for
no fucking way