This worksheet allows you to compare the financial consequences of
several different refinancing plans.
By financial consequences, we mean how much principal you
can pay off, and how much money you can save. The sum of these we call
your total assets.
You can see how differences in a variety of factors
(such as interest rates, loan lengths, and closing
costs) effect your total assets.
Up to three loan plans can be examined at a time. One of these
can be an ARM or balloon loan.
In addition, you can compare the financial impacts of a future home-equity loan
(say, to pay for a child's education).
ReFinance will calculate the financial implications of refinancing your
home mortgage. By financial implications, we mean the effects of a refinancing
on your monthly payments, on the principal paid off, and on a bank account balance.
The basic philosophy of ReFinance is that each month you can invest money in your house,
or you can invest money in your bank account, or you can spend it. ReFinance
allows you to compare how different mortgages effect these categories. In other words,
ReFinance recognizes that any mortgage plan involves tradeoffs.
For example, a long-term-higher-rate plan may allow you to
build a bank account (or have more cash available for living expenses), but
also means you'll own a smaller fraction of your house.
ReFinance allows you to simultaneously compare 3 mortgages at a time.
To facilitate comparisons, ReFinance assumes you are divvying up the
same monthly payments. Depending on the mortgage (and depending on some other
options that you can set), this monthly payment can:
- pay off the principal you owe
- pay the interest on the loan
- be saved to a bank account
- be spent on consumption goods
The primary output from ReFinance is a month-by-month (or a condensed year-by-year)
listing of both the principal you've paid off, and how much money you have in your
bank account. The sum of these represents the financial return on your monthly payments
(in other words, it is the cash you'ld have if you sold your house and zeroed out your bank account).
ReFinance has a number of advanced features:
- One of the three loans can be an ARM
- You can take out a home-equity loan at any time. This allows you to compare the
financial implications of a high-monthly-payment/low-interest loan (which entails less
money available for saving to a bank account) and a
low-monthly-payment/high-interest loan (which entails
a larger fraction of your mortgage going to interest payments).
- You can model the future trend in interest rates, both for the ARM loan and for
the interest you recieve on your bank account
- You can dedicate a fraction of your monthly payments to "extra savings", or to
"extra consumption". For example, by specifying extra consumption as a
feature of a refinance mortgage, you can see the long-term
financial implications of obtaining
a lower interest rate, and using some of your reduced mortgate payments to up your
current standard of living.
- You can pay closing costs out of pocket (that is, by reducing cash in your
bank account), or you can roll it into your loan.
- If your bank account drops below zero, you can apply charge yourself
a large interest rate (say, one the represents cash you borrow against
a credit card).
Are you looking for a loan calculator? If all you want to do is calculate
the monthly payments for a possible mortgage, try this
simple mortgage calculator
- Mortgage: Interest
-
Enter the yearly interest rate for each of the three loans.
For example, 5.75 means 5.75%.
Actually, for the Plan ARM, this will be the starting interest
rate that is used for the starting fixed-rate period.
- Mortgage: Term
-
Enter the term of the loans (the number of months within which
it must be repaid). Note that this if you make additional payments to
principal, the loan will be repaid earlier.
Typically, longer term loans have larger interest rates.
- Mortgage: Closing costs, from bank
-
Enter the closing costs (including points) of the loan (in dollars).
This will be subtracted from your starting
bank balance (which can be $0).
- Mortgage: Closing costs, rolled into loan
-
Enter the closing costs (including points) of the loan (in dollars).
This will be rolled into your loan -- which means your mortgage will
be larger.
Note that you can split your closing costs between withdraw from
bank and roll into loan, or you can allocate the entire closing
costs to one of these two categories.
- Mortgage: Consumption
-
Enter the per-month extra consumption expenditures.
This value represents money you choose to squander
(say, on shoes for the children), rather then using to
build up your bank balance or to pay down your principal.
- Monthly expenditures
-
The disposition and size of your monthly expenditures
will be a function of the mortgage payments,
extra consumption, and
extra savings ...
- Let x stand for Plan A, Plan B, or Plan ARM
- Call Cx your plan-specific extra consumption expenditures.
- Call M your mortgage payment
(it is the same for all three plans).
- You can either chose its value, or you can let the program chose a value.
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- If you let the program chose, it will chose the
largest required mortgage payment of the three plans.
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- Compute Dx, the difference between M and the
actual mortgage payment required by the bank.
- If you let the program chose M ...
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- one of the Dx will be $0.00
|
- If you explicitly choose a low mortgage payment ...
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- none, one, two, or all of the Dx value can be less then zero.
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- If Dx is greater then Cx, then
- If Dx is less then or equal to Cx, then
- Cx will be your extra consumption
- Wx = Cx - Dx
will be removed from your savings each month.
- Regardless of the values of Cx and Dx,
your extra savings will be saved each month
(though some of this savings may be immediately withdrawn to pay for Wx!)
- Mortgage ARM (adjustable rate)
-
An ARM is a two part loan. The first part, lasting between 3 and 7 years,
typically has a low fixed interest rate. In the second part, which lasts for the remainder
of the loan, the interest rate adjusts each year.
In real life, the new rate is often computed by adding a few percent to some
macroeconomic measure (such as the average 30 year bond rate).
In this program, the interest rate is based on the savings rate
at the beginning of each year.
You can set the size of this adjustment,
the maximum it can jump in a year, and its overall maximum.
A balloon loan is like an ARM, but the rate adjusts only once (at the
end of the fixed rate period).
Note that an ARM loan is a gamble -- you usually get a low rate now, but
you are betting that interest rates don't explode in a few years.
- Mortgage ARM: fixed rate period
-
Number of months that a fixed rate will
be used. After this many months, the interest rate will adjust (adjustments will
occur every 12 months).
For example, to specify a 3/1 ARM, use 36 months.
- Mortgage ARM: interest adjustment
-
Enter the premium, in percent. For example, 2 means 2%.
This premium is added to the bond-rate (at every 12 month interval),
to compute the next year's mortgage interest rate.
For example, assuming a 3/1 ARM, if the bond-rate in month 60 is 4%,
and your interest adjusment is 2, then (assuming no sudden
jumps have occured)
the next year's interest rate will be 6%.
Note: in most real loans, a macro indicator (such as the current 30 year Treasury
Bond Rate) is used. For simplicity, this program uses the savings
rate as a close approximation.
- Mortgage ARM: maximum rise -- per year
-
Enter the maximum the interest rate can increase, in percent.
For example, 2 means 2%.
This is used to prevent sudden jumps due to a very rapid rise in the
bond-rate.
Note: for a ballon loan, set maximum yearly increase to 0
- Mortgage ARM: maximum rise -- entire loan
-
Enter the maximum the interest rate can increase over the life of the loan, in percent.
For example, 6 means 6%.
This is used to limit the maximum interest rate you pay. For example,
if your starting rate is 4.5%, and the maximum total increase is 5%, then your
yearly interest rate can never exceed 9.5%
- Investment Strategy
-
You can choose between three investment strategies. These strategies
direct what happens to refunds (primarily
your income tax deductions due to interest payments)
and overages (primarily the difference between the money you allocate
to the mortgage, and the monthly mortgage payment required by the bank).
- Pay off loan: refunds & overages are used to pay down the principal
- Saved to bank: refunds & overages are added to your bank account
- Mixed strategy: A combination of pay off loan and save to bank.
In each month, compare the current tax-free bank interest rate against after-tax mortgage
interest rate, and choose the strategy with the larger rate.
- Notes:
- Principal
-
The starting principal is the amount of principal you currently have
on the house. This is included strictly for informational purposes, it does not
effect any calculation.
The remaining principal is what you owe -- it's the amount you
need to borrow.
- Starting bank balance
-
Your starting bank balance, in $. This can be $0.
Note: it is possible for your bank balance to drop below zero. The
program assumes you'll make it up from somewhere (it will not
reduce your principal automatically). Of course, your total asset value
will be reduced when your bank balance is below $0.
- Type of savings instrument
-
You can specify the type of savings instrument you use:
- Normal bank account: Money is placed into a single
tax-free account.
The entire balance in this account grows at the current (monthly) rate of
tax free interest.
- Sequence of bonds: Every month, any savings are used to purchase
a tax-free long-term-fixed-rate bond.
Since the tax free bond-rate can change over time, this means
that each bond will grow at its own rate.
Note that if you model an increasing tax-free interest rate, the
bank-balance from the sequence of bonds will be lesser then
from the normal bank account. However, it may be more realistic
to assume the only tax free asset available to you is
a long-term-fixed-rate bond.
- Trend of the savings/bond interest rate
-
This program allows you to model the interest rate on
tax-free bonds, on a month-by-month basis,
using a quadratic equation in time:
bond_rate = b0 + b1*t + b2*t*t
where:
- t is the month (from 1 to 180).
- b0 : starting rate
- b1 : yearly increase (in percent).
- b2 : an accelerator (or decelerator) factor
| Examples |
|---|
| b0=3, b1=0, b2=0 | A constant 3% rate. |
| b0=3, b1=0.5, b2=0 | Start at 3%, increase 0.5% a year
|
| b0=3, b1=0.5, b2=-0.0015 | Start at 3%, increase 0.5% first year with
smaller increases in later years, after 15 years rate is 6.6% |
- Note:
- This interest rate is assumed to be tax-free. In contrast, the
mortgage rates (both the main mortgage, and a possible home-equity loan) are before
taxes.
- Credit card premium
-
The credit card premium is used to determine your credit-card interest rate --
credit_card_interest_rate = current_bond_rate + credit_card_premimum
If you bank balance drops below $0, then this credit_card_interest_rate will
be used. The idea is that you need to borrow from an expensive source (i.e.; your credit
card) to make up for running out of savings. That is, your negative balance
will grow at this high interest rate, and not at the
bank account/bond interest rate.
- Marginal tax rate
-
The marginal income tax rate you pay. This should be the total of all federal, state
and local income tax rates. Assuming you itemize your deductions, the program will
compute this fraction of your interest payments, and add it to your bank account
or your principal (depending on what strategy you chose).
Example: if your federal income tax rate is 27%, your state is %5, and your local is
2%, then the total marginal tax rate is 34%.
You should enter that as 0.34.
- Total Assets
-
Total assets is the sum of your principal (the amount of your house
you actually own) and money in your savings bank. Assuming no serious liquidity
concerns, one goal is to maximize total assets at the end of the loan (or
at a point in time you intend to sell the house).
- Mortgage Payment
-
The size (in $ per month) of your mortgage payments.
In order to make it easy to compare loans, this amount will
be paid for each loan plan, regardless of the payment required by the bank.
Thus, if the payment required by the bank is less then
this value, the excess will be used to pay down the principal.
Conversely, if the required payment is greater then this value,
the shortfall will be withdrawn from your
bank account (note that your bank
account can drop below $0).
If you leave this blank, the maximum first-month-mortgage-payment, of the three loan plans,
will be used.
Note: your monthly expenditures are
a function of the mortgage payment, your extra consumption,
and your extra savings.
- Extra Monthly Savings
-
You can add this much (in $ per month) to your bank account each
month. This can complement, or substitute for, paying down your principal using
a larger then required mortgage payment.
- Home Equity Loan
-
As an optinal feature, this program allows you to take out a home equity
loan (say, to pay a child's tuition).
You can set the amount of this loan, when to borrow, how long to take
pay it back, and the interest rate.
- Home Equity Loan: Size of Loan
-
The amount of cash you need. The program will first withdraw cash from
your bank account. If there is not enough in your bank, it will obtain
the remainder using a home-equity loan. Note that your
total asset value will be reduced by the amount you owe on an outstanding
home-equity loan.
- Home Equity Loan: Month it is needed
-
Enter the month you'll need to (possibly) take a home-equity loan.
If you do not intend to take a home-equity loan, leave this
field blank.
- Home Equity Loan: Months to pay it off
-
Enter the number of months needed to pay off the home equity loan.
Thus, if you take a home equity loan in month 70, and
use 74 months to pay it off, your final home-equity loan payment
will occur in month 144.
- Home Equity Loan: Interest premium
-
Enter a premium, in percent. For example, 2 means 2%.
This premium is added to the bond-rate (at every 12 month interval), to compute
the home-equity loan interest rate (note that this will be a fixed rate,
good for the life of the home-equity loan).
For example, if the bond-rate in month 80 is 4.25%,
and your home-equity loan interest adjusment is 1.5, then
the home-equity loan interest rate will be 5.75%.
- Home Equity Payments
-
If you choose to take out a home equity loan at some point,
this value is used to pay it back ($ per month). As with the mortgage payment,
extra amounts are used to pay down the home equity loan, and shortfalls
are withdrawn from your bank account.
Leave this blank and the program will figure out a value (using the
home-equity-loan payment computed for plan B).
Disclaimer
This ReFinance program is meant to give the user a general sense of the
financial factors relevant to a decision to
refinance a home. It is not
guaranteed to be accurate.
It might even be wrong in important details.
Therefore, this program is offered without any WARRANTY or ASSURANCE
of reliability. If the program's conclusions should be flat out wrong,
and cause you any kind of harm, we are NOT TO BLAME!
That said ... we've made a good deal of effort to check
both the accuracy of the calculations and the relevant regulations,
and we've used it in our own financial considerations. If you find
bugs or other problems, please contact us (at danielh@crosslink.net).