Few know this refinance formula!
There are plenty of good reasons to refinance – to eliminate PMI, to lower payments to ease monthly obligations, to access equity, etc… BUT to lower your interest rate is NOT always a good reason.
Because of the way a loan amortizes (gets paid off), lowering the rate does not always mean paying less interest. If one of the first questions your loan officer asks is not “How long have you been in your current mortgage?” then they may not be doing a critical calculation. That’s because as you get deeper into your loan, even though the interest rate is constant, you pay less interest, in dollars, with each subsequent payment.
As mentioned, there are lots of good reasons to refinance, but if your major objective is to save money - keeping more dollars in your pocket, then there is a quick “hack” to make that determination.
If you do not have access to custom amortization charts and a mortgage calculator, you may need the assistance of a professional (I know one).
Here’s how it works.
- Determine what your new mortgage loan amount is going to be, including any costs or pre-paids that you want included in your new mortgage.
- Apply your new, lower interest rate to this loan amount
- Calculate how many months it will take to pay off your new loan if you continue to make your current mortgage payment.
- How does this compare to the remaining months on your current mortgage?
- Multiply the difference in the number of months to pay-off by the monthly payment
- VOILA! That is actual dollars in your pocket if you refinance to lower your rate but maintain your current payment. If the rate reduction is significant, that savings will be substantial – very substantial!
This does not mean that you won’t save money if you sell your home before the loan is paid off, but you need to compare the amortizations of both loans to see exactly what month your interest savings has covered your cost to refinance, and when you start “making money”.
The bottom line is to be aware if you are lowering your payment because you are saving interest or just because you are extending the terms of your loan. This “hack” strips the calculation down to actual dollars saved.
With just a copy of a recent mortgage statement, an estimated home value and your credit score this calculation can be easily done by an experienced mortgage professional.
Please call Danny Poulos (nmls#133260) directly at 561-373-4149 or email DJPoulos@EliteLending.biz to find out today if refinancing is right for you while rates remain at historic lows!