Reader Analysis: Should he refinance?

I was speaking to a friend today and we got on the topic of rental property as an investment.  I have always been intrigued at the idea of becoming a real estate mogul but I never had the knowledge necessary to make an educated decision on where, when and how to buy.  For the sake of this discussion I will refer to this friend as Joe. 

Joe and his wife bought a house 7 years ago, for $152k under the impression that they would live in it for the next 15-20 years.  After 5 years, in the house, Joe’s employer transferred him overseas and he was forced into a “sell or rent” decision.  At the time he chose to try and rent out his house because he felt that he would lose too much money in the sale.  He hadn’t lost any money in the house but he had not built up enough equity to pay for the realtor fees during the sale.

He informed me that he is now losing over $100 a month because he was not able to rent it out for a price that would cover all his costs.  After some questioning I realized that he still had his original 30-yr fixed rate mortgage.  He couldn’t tell me his interest rate, off the top of his head, but he was very proud to tell me that he only had 23 years left on the loan.  After some digging I found out that for the past 7 years he had been paying a 6.3% INTEREST RATE!!!  Ever since the market tanked in 2008 mortgage rates went from low to lower.  I asked him if he knew how much he was actually paying in principal and he didn’t know.  I also asked if he knew that the average 30-yr fixed mortgage rate was currently around 3.3%.  He said he had heard something about it but that it would change his payment much.  I very quickly did some math and showed him a few comparisons.

Current Mortgage:

Price paid - $152k

Amount owed - $136k

Interest rate – 6.3%

Monthly payment (minus tax/insurance) - $940

Amount to principal this month - $220

Now compare the numbers above to the amount Joe would be paying if he refinanced at todays rates.

15-Yr Refinance:

Price paid - $146 ($136 + $10k closing costs)

Amount owed - $146k

Interest rate – 2.7%

Monthly payment (minus tax/insurance) - $987

Amount to principal this month - $658

I understand that closing costs can change based on the bank and points but I wanted to illustrate that even with a huge closing cost Joe could still save money.

So with this new mortgage Joe would only spend $47 per month and would still be paying off $438 more per month towards the house.  That comes to $5,256 extra in principal paid just in the first year.  Under this new mortgage Joe will pay off his house in the next 15 years (8 years early).  He will also only pay $31,717,17 in total interest over the life of the loan instead of the $186,701.91 that he is currently on track to pay.  That is a savings of $154,984.74 in interest over the life of the loan.

If you haven’t checked on refinancing since the 2008 market crash than it might pay to take a look.