We were approved for a refinance earlier today. Now that the dust has settled, I did some fun math.
I was comparing interest rate differences of 1/8 percent with paying extra the first month, effectively reducing the initial loan principal.
Various variables aside, I noted that apparently paying a couple of thousand dollars extra the first month would bring about the equivalent savings over the span of the loan as a rate of 1/8% lower.
Does that seem reasonable? If so, maybe we're too concerned about hunting for the highest FICO scores and the lowest interest rate. Paying extra on your mortgage, even just first month, can be very powerful.
Without knowing the various variables to which you refer, at first blush this seems like it could be an accurate assessment. An eighth of a point is not a big drop in rate, and when you factor in the closing costs associated with the new loan, the savings might not be so tremendous.
In my opinion, a good way to determine whether a refinance would make sense is to figure out how long it would take for you to recover the closing costs at the lower rate (without figuring in any extra payments). If there is a big drop in interest rate, then costs could be recovered pretty quickly, but a drop of 0.125% would take much longer.
Thanks for the feedback. I've heard that as general rule (but it depends on all the specifics) 1/2 percent likely makes the whole thing worthwhile (including how badly you want your EX score). Our reduction a year ago was 3/4 percent, and now it's another 3/4 percent. I find that stunningly amazing. And of course the less of an obligatory monthly payment, the more you can prepay. There's something really fascinating about this. I'm beginning to realize just how much extra you pay for every added purchased household item due to thereby sliding on the monthly mortgage payments.