Many people use is that is you can lower your rate by a half a percent, a quarter of a percent, or save more than $50 a month you should refinance. But THEY ARE WRONG THERE ARE OTHER CIRCUMSTANCES TO TAKE INTO ACCOUNT.
If you have been in a mortgage for more than 4 years it may not wise to refinance, if you are simply trying to lower your payment. I am going to show you a scenario why you should not refinance your mortgage.
Let’s say you got a home mortgage for $200,000 at 6.125% back in Nov 2004. ( Your first payment was in November). So going off an amortization schedule your current balance this month would be $189,209.15. You would have paid down your home mortgage by $10,790.85 in the last 4 years.
But you would have paid $49,,470.44 in interest in the last 4 years. So your mortgage person officer is calling you. He or she are telling you that they can save you money. They can get you a no cost loan at 5.625%. Your new payment on a $189,000 mortgage would be $1087.99 A SAVINGS OF $127.23 A MONTH! A NO BRAINER RIGHT…… WRONG, WRONG, WRONG……. (there is an exception where it may make sense)
Now you have a new thirty year fixed mortgage instead of 26 years left. So now you will have 4 additional years of interest to pay. If you run a amortization schedule on the $189,000 mortgage starting in January at 5.625% you will find you will have to pay $41,375.63 of interest on those four years.
So divide that $127.23 into that $41,375 of interest on those four years. It will take 27.1 years to break even and you added 4 years to your home mortgage. NOT THE SMARTEST FINANCIAL MOVE!
Let’s look at this a different way. On your first mortgage of $200,000 you would have paid $237,479.59 in interest over the 30 years. But wait you already paid $49,470.44 in interest. So that means you only have $188,009.15 in interest left to pay. But that nice loan officer wants you to get that new loan. That new loan will have $202,676.62 in interest to pay.
So does it make sense to get into a loan that will add four years to the loan and have an additional $14,667.47 in interest to pay. 202,676.62 – 188,009.15 = $14,667.47 in additional interest. And take 27.1 years to break even when you could be finished with your current loan in 26 years. NOT THE SMARTEST FINANCIAL MOVE.
One of the reasons you would want to do this loan in this circumstance is that you need better cash flow. If you have financial problems and need a lower payment then you may want to chose to do it.
Another reason you may want to do it is if you continue to make the same old payment. If the client only pays the new lower payment I am right and you don’t want to refinance. BUT If you would pay the old payment on the new loan you could actually shave off three years off the loan. You could have the loan paid off in 23 years!!! (Actually a little less than 23 years) So if you can afford the old payment and continue to make the new payment you would save 3 years and $26,757.15 in interest.