October 31, 2012 in Mortgages

Dear Dr. Don,
Would I see enough savings that it would pay to refinance my mortgage? The rate is now 4.25 percent and would be reduced to 3.25 percent if I refinanced. I’ve had this mortgage for three years, and it’s a 30-year mortgage. The refinanced mortgage also would be for 30 years. We don’t plan to be in this home for 30 years. We will probably sell this house in 10 to 15 years.

Thank you,
— Kathleen Continuum

Dear Kathleen,
It makes sense to refinance your mortgage if the interest savings are greater than your closing costs. You didn’t tell me the loan balance, so I’m going to run the numbers for a \$100,000 mortgage. The numbers will be scalable, so if you’re looking to refinance a \$200,000 mortgage you can multiply the interest savings by two.

## Savings through refinancing

 Existing Mortgage Refinancing Difference Loan amount \$100,000.00 \$100,000.00 Interest rate 4.25% 3.25% 1 point Loan term (months) 324 360 Loan payment \$519.36 \$435.21 \$84.15 Total interest expense \$68,273.27 \$56,674.27 \$11,599.00

Since you don’t plan on being in the house for the full term, you won’t capture all the savings in the above table. Here’s what the savings would look like 10 and 15 years from now.

## Savings if you move out early

 10 years Loan payment Total interest Loan balance October 2022 Original loan \$519.36 \$37,675.10 \$75,351.66 October 2022 Refinancing \$435.21 \$28,954.23 \$76,729.47 Savings \$8,720.87 \$(1,377.81) 15 years Loan payment Total interest Loan balance October 2027 Original loan \$519.36 \$51,990.45 \$58,505.30 October 2027 Refinancing \$435.21 \$40,273.34 \$61,936.20 Savings \$11,717.11 \$(3,430.90)

As you can see, the savings look good in a refinance, even if you don’t stay in the house for 30 years. Getting a new 30-year loan puts you a little behind on paying down the mortgage balance, but you can turn that around by making additional principal payments each month equal to the \$84.16 difference in the mortgage payments.

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