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Deciding when to
refinance your current mortgage is not really that complicated. All you need is some of
the facts about the new mortgage that you will be getting to refinance your old mortgage.
Then just plug those facts into a simple worksheet and you will be able to determine just
how long it will take for you to recoup the cost of the new mortgage you are getting to
refinance your old mortgage. Because every new mortgage has costs associated with it, you
must take those cost into account as well as how much lower the new mortgage interest rate
is versus your current mortgage interest rate. There are rules of thumb that the
difference between your current interest rate and the new interest rate you will be paying
for the refinancing mortgage must be at least 1.5 to 2 Percentage Points.
Lets look at some samples:
|
Refinancing Your Current Mortgage |
A. Using
an original $100,000 mortgage with a current balance due of $95,000. We will
borrow $95,000 to pay off the current balance. |
Current
Mortgage Interest Rate: |
Interest
Rate on New Refinance Mortgage: |
Current
Monthly Payment (P & I): |
Interest
Portion of Current Monthly Payment:* |
New
Monthly Payment (P & I): |
Interest
Portion of New Monthly Payment:* |
Reduction
of Interest Portion of Monthly Payment: |
Closing
Cost of New Refinance Mortgage:** |
Number
of Months with New Mortgage to recoup the new Closing Costs: |
Total
interest savings at the end of 5 years from the date you refinance AFTER you recoup the
new closing costs:*** |
| |
8% |
7% |
$734 |
$634 |
$599 |
$554 |
$80 |
$1,900 |
24 |
$2,084 |
| In the above example, the 1 Percentage Point reduction in the interest
rate results in an interest savings of $80 on the monthly payments. At that rate, it will
take us 24 months to recoup the $1,900 in closing cost of the new mortgage we are using to
refinance our old mortgage. After we recoup that $1,900, we will save $2,434 at the end of
5 years with the new mortgage. This means we need to stay in the house for at least 24
months just to recoup the closing costs of refinancing. This may not be worth the trouble. |
8% |
6% |
$734 |
$634 |
$570 |
$475 |
$159 |
$1,900 |
12 |
$7,205 |
| In the above example, the 2 Percentage Point reduction in the interest
rate results in an interest savings of $159 on the monthly payments. At that rate, it will
take us 12 months to recoup the $1,900 in closing cost of the new mortgage we are using to
refinance our old mortgage. After we recoup that $1,900, we will save $7,205 at the end of
5 years with the new mortgage. This means we need to stay in the house for at least 12
months just to recoup the closing costs of refinancing. This looks a lot better. |
8% |
5% |
$734 |
$634 |
$510 |
$396 |
$238 |
$1,900 |
8 |
$11,945 |
In the above example, the 3 Percentage Point reduction in the interest
rate results in an interest savings of $238 on the monthly payments. At that rate, it will
take us 8 months to recoup the $1,900 in closing cost of the new mortgage we are using to
refinance our old mortgage. After we recoup that $1,900, we will save $11,945 at the end
of 5 years with the new mortgage. This means we need to stay in the house for at least 8
months just to recoup the closing costs of refinancing. This looks pretty good.
|
B. Using
an original $100,000 mortgage with a current balance due of $95,000. We will
borrow $100,000 to pay off the current balance and use the $5,000 cash out
to invest or make improvements. |
8% |
6% |
$734 |
$634 |
$600 |
$500 |
$134 |
$2,000 |
15 |
$5,654 |
| Since we learned above that a 1 Percentage Point reduction in interest
rate results in very little advantage, we start here with a 2 Percentage Point reduction.
Since we are borrowing an extra $5,000 above the current balance of our original mortgage,
then the results are not as favorable. It will take us 15 months to recoup the new
mortgage closing cost. After we recoup that, we will save $5,654 at the end of 5 years
with the new mortgage...plus we will have the extra $5,000 to invest or to make
improvements. |
8% |
5% |
$734 |
$634 |
$537 |
$417 |
$217 |
$2,000 |
9 |
$10,643 |
| In this above example we use a 3 Percentage Point reduction. Since we are
borrowing an extra $5,000 above the current balance of our original mortgage, then the
results are not the same as borrowing the $95,000.. It will take us 9 months to recoup the
new mortgage closing cost. After we recoup that, we will save $10,643 at the end of 5
years with the new mortgage...plus we will have the extra $5,000 to invest or to make
improvements. |
Important Notes: |
| * |
Remember that you do not include the
principal portion of the monthly payment when comparing the interest rates of your current
mortgage and the rate of the refinance mortgage since that is your money that is building
up your equity in your house. We only compare the interest portion of the monthly payments
since that is what it is costing you to finance your house. |
| ** |
For the closing cost of the new loan
we use 2% of the principal. 2% of $95,000 is $1,900.2% of the $100,000 new loan in our
example "B" is $2,000. |
| *** |
This is a little more complicated. We
must look at the actual interest portion of each payment to make this comparison. Since
the old mortgage is already about 5 years old to have a current principal balance due of
$95,000 down from the original $100,000, the monthly payments at the end of 5 years have a
different ratio of interest vs. principal. After 5 years, 86% of the monthly payment is
interest and 14% is principal. However, when you refinance and start a new loan, the early
payments on the new loan at a 2 percentage point reduction in interest rate is 83%
interest and 17% principal. These numbers can be verified by using an actual amortization
schedule for each loan at each interest rate in our examples above. |
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As you can see from our examples above, don't be talked into refinancing your current
mortgage unless there is a substantial reduction in the new loan's interest rate and
closing costs on the new loan that are not too high. High closing costs force you to stay
in your house a longer period of time just to recoup those high closing costs out of the
savings in your new monthly payments due to the refinance. And remember, do NOT consider
the principal portion of the monthly payments when making the comparison as that is your
money going into your equity in the house. The only portion of the monthly payments to
compare is the INTEREST portion since that is what it is actually costing you to finance
your house. |
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For complete details and current interest rates e-mail :
Refinance@Mortgage2USA.com
or use our "Visitor Info Request Form
For VA Loans up to $359,650...use this Pre-Qualify Form :
VA Pre-Qualify Form
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