Mortgage Math or How to save $17,529

Mortgage Math or... How to save $17,529 dollars*.

You like math? I don't. All those numbers mixed in with the alphabet...it always seemed fishy to me but apparently, if you do it right, it can allow us to put a man on the moon or shoot a camera to Pluto, a gazillion miles away. Which is odd as sometimes my computer can't find the Internet signal from the basement of my house.

And bank math? It takes a special type of person to want to really sit down and figure out where you are in the future regarding retirement savings, especially if you are only given a 30 minute appointment.

I, personally, have lots of trouble ever imagining myself living mortgage free, it's easier to believe I am paying rent for the rest of my life. It's just too far in the future for me. It may as well be Pluto.

But one of the advantages of a mortgage broker is if you ask, I will show you the savings when you refinance or switch your mortgage. One of the more frustrating issues for people looking to refinance or switch is the penalty payout hidden in the fine print of most fixed mortgages. It can run into the thousands of dollars and it is a hard pill to swallow, particularly if you are only going to save 1% on a new interest rate. That's usually enough for people to walk away from looking further.

mandatory Pluto picture

But let's look past the smaller picture. There is a lot of talk of the average high debt load Canadians carry (north of $150,000 per person). The three major debts are mortgages, credit cards, and student loans. How can refinancing your house help you relieve that debt burden when on the surface, it appears you are actually increasing your debt?

Below is an example of how refinancing could help you save thousands of dollars. If you hate reading about math as much as doing it, then here's the too long, didn't read version;

TL;DR version - Merge your credit card debt with your mortgage; changing a 19% interest rate to 3% over 25 years will save you thousands of dollars over the long term. 

The Question in Math Form (all numbers approximate)

Person A has $25,000 in credit card debt at 19% among various cards. They make payments of $750 per month minimum on the credit cards. They have a house with a mortgage of $275,000, now worth $320,000. They have a fixed interest rate of 3.75% at RBC and 22 years left on their 25 year amortization. They pay $1531.31/month mortgage payments.

Should this person consider refinancing/switching their home to pay off their credit card debt? 

The Answer in Math Form

*Assuming they qualify for new mortgage at 3%.

New mortgage would now be $300,000 (current balance + credit card debt)
New amortization of 25 years (300 months)

Payments would be $1422.63 a month ($108.68 less difference)

Add in estimated legal costs of $1000.
Penalty of 3 months Interest or Interest Rate Differential $2558.49* approximate (RBC source)

Cost of refinance; approx $3558.49

Vs.

Not Refinancing

Person B continues paying $1531.31/month +$750/month credit card (with no extra charges) = 2281.31 a month in house and card payments.

$25,000 at 19% interest, paying $750 a month (with no extra purchases) = 4 years to pay off

Summary

Not Refinancing; Person A will continue to pay $2281/month in combined bills. If they make no further charges to their credit card, with payments of $750 a month, it will take 4 years to have a zero balance.

Refinancing; Person B will pay $1422.63 ($858.68 less) a month than previous due to a .75% rate reduction for a $108 lower mortgage payment. They are no longer paying a $750 credit card payment. The extra 3 years in payments to their new mortgage equals only $3912.48.
The immediate cost of refinancing is an estimated $3558.49*

Short Version;

Original credit card debt of  $25,000.00
- 3 years extra payments      $  3912.48
-est.approx cost of refinance$  3558.49*

Refinancing savings of        $17,529.03


By paying approximately $3558 to refinance and increasing their mortgage payments by only 3 years, Person A saves over $17,500 by merging his credit card debt into a new mortgage. 


Seems all right to me...

science seems legit...