You originally obtained a regular, 30 year mortgage loan. Now, it’s 10 years later. Under normal circumstances, you would have 20 years remaining. Even if mortgage rates are lower than your current rate, who wants to start all over with a 30 year, right? This is a very common misconception, even among people who have good math skills. You are very likely leaving thousands of dollars on the table. Here is how it works. Let’s say your original mortgage loan was obtained 10 years ago. You started with a balance of $400,000, at a rate of 7%. The payments were (and still are) $2661.21 a month. 10 years later, the remaining balance is $343,250 and you have 20 years left to pay. Suppose rates are now 6.25%. That’s not a huge difference, but even so, watch what happens. To refinance down to that rate, let’s assume $5,000 in costs, added to your current balance. Now you owe $348,250 and the new payments are $2144.24 per month, using the lower rate. The good news is that your payments are $517 lower per month. The bad news? You have to start all over with a 30 year loan, right? You’re going to pay even more interest, right? Nope. If you don’t need to have those lower payments, nothing could be further from the truth. How can that be? Here is the answer. All you have to do is make the OLD payments of $2661.21 month. (Pretend you never refinanced.) Now, here’s the math. Because your new mortgage rate is lower and because you are making the old payments, much more of that same payment is now going to principal. What does that mean to you? If you had kept your other loan, you would have 20 years remaining, as we discussed. Using the new plan, you only have about 18 1/2 years remaining until you fully pay off your loan. Not bad. Check out the summary below.
Keeping Your Current Mortgage Loan
•Your balance after 10 years: $343,250
•Current monthly payment: $2,661
•Years remaining until paid off: 20
•Total interest you paid: $250,700
•Payment savings: $0
•Interest savings: $0
Refinancing Your Mortgage, But Making The Same Payment
•New refinance balance, including costs: $348,250
•Continue making the old payment: $2,661
•Approx. years remaining until paid off: 18.50
•Total interest you paid: $237,900
•Payment savings: $47,900
•Interest savings: $12,800
Magic? When rates are lower, it can be. Imagine the savings if rates are even LOWER. The bottom line is that simply looking at the remaining time until you pay off your mortgage is only part of the puzzle. Don’t leave your money on the table unless you love overpaying. Stay in touch. There could be magic on the horizon. Forward this article to a friend! As always, if you need help or advice, just respond to this email.
