Have you been seeing and hearing ads to refinance your mortgage? Wondering if a no-cost refinance is too good to be true? Well, as Mike explained, a no-cost refinance is certainly possible and if you can refinance your mortgage to a lower rate at no costs – refinancing always makes sense.
“But, I only have 27 years left on my original 30 year fixed mortgage, why would I start over?!”
This is a common misconception about refinancing. The reality is – you can simply pay the same amount you were paying before refinancing and you will pay off your new mortgage in less time than is remaining on your current mortgage.
Here’s an example:
Let’s say Jim took out a $550,000 30 year fixed mortgage 3 years ago at 4.500%. His principal and interest payment is currently $2,786. After 3 years of making payments, here is how he stands..
$522,140 = is the principal amount Jim owes on his current mortgage after 3 years of payments.
$380,772 = is the total amount of interest Jim will pay over the remaining 27 years of his mortgage if he didn’t refinance.
If Jim can refinance to 4.25%, a savings of “just” .25%, his (minimum) principal and interest payment based on a new loan amount of $522,140 will be $2,568. IF Jim only made his minimum monthly payment he would be looking at…
$402,561 = is the total amount of interest Jim would pay over 30 years if he only paid his minimum monthly payment.
Why the heck would Jim refinance if he is going to pay more interest after refinancing even if he lowers his rate by .25%? Well, plenty of people would want to lower their payment $200+ a month even if they pay more in the long run, but for the borrowers who are more concerned about how much interest they pay over the life of the loan, things change if Jim has the discipline to pay the same amount he was paying before he refinanced. If Jim refinances to 4.25%, but continues to pay $2,786 a month he will be looking at…
$336,763 = is the total amount of interest Jim would pay over the remaining 25.7 years.
Yes, by refinancing into a rate that is ‘just’ .25% lower than his current rate, Jim has saved himself nearly $44,000 in interest over the next 25.7 years (roughly $1,300 in the first year), which means he shaves 15 months off his loan term and he did this all at no costs! Perhaps this will allow Jim to retire 15 months earlier.
Refinancing while paying costs can make financial too. Keep an eye out for a follow-up article on how this pencils out.
If you can afford a larger minimum monthly payment, it may make sense to shorten your mortgage term and potentially secure even more interest savings.
We consistently beat banks, credit unions and other mortgage brokers on rates, costs and service. If your property is located in California, click the green button below to see how much you can save – perhaps it will be even more than Jim!