May 15, 2013
BRP Guest Blog
Intro by Jeff Bronswick, Managing Partner of Bronswick Reicin Pollack:
I recently refinanced my home mortgage and thought it would be beneficial for all to hear the math behind refinancing. No matter if your goal is to save in the short-term or long-term, there are mortgage options out there that really make sense.
Steve Smith is a friend of BRP’s and is very knowledgeable in the mortgage lending industry. I want to say thank you to Steve for offering his expertise to us and our clients.
Achieving Your Savings Goals in Refinancing
As interest rates continue to remain low, chances are you have already refinanced your mortgage, or at least thought about it. But when is the best time to refinance and what is the best way to go about it? I often hear comments like, “the rates only dropped a quarter” or “I don’t want to go back to a new 30 year fixed because I only have 27 years left.” To answer the when, why, and how is not determined solely by interest rates, but more importantly the MATH involved in your total payments.
For example take a $300,000 first mortgage. Original terms are a 30 year fixed with a note rate of 4.5%. The principal and interest payments of this loan are $1,520.06. If a borrower were 2 years into this loan and had paid only the minimum required towards the principal balance, the remaining principal balance would be $289,666.12. What should the new loan amount be? How much better does the rate need to be for me to save money? The strategy for structuring the loan will always depend on the overall goal for the borrower. Is the goal to save the most money over the life of the loan or save the most money per month, a cash-flow focused refinance?
For most borrowers the goal of a refinance is to save the most amount of total money over a given period of time. That may or may not be the actual life of the loan, depending on if they feel they will refinance or sell and pay off the original loan in less time than the original loan term. Others will choose the lowest rates and longest amortization term, therefore having the lowest payments.
So here is the MATH:
Depending on the loan product chosen, fixed rate, adjustable rate, with or without fees the rates can be drastically different. I will give an example of fixed rates below.
Save money monthly. New loan amount $289,666. 30 year fixed at 4%. Principal and interest payment $1,382.91. Monthly savings $137.15. Lifetime savings over the next 30 years is calculated the following way. Original loan had 360 total payments, but now you are 24 payments into the loan. Therefore total payments for the current loan are 336 x $1,520.06 = $510,740.16. For the new loan the total payments are calculated as 360 x $1,382.91 = $497,847.60. Total lifetime savings $12,892.56.
Save money over the life of the loan. New loan amount $289,666. 30 year fixed at 4%. Principal and interest minimum payment $1,382.91. In this case we are not going to change cash flows, so we will calculate based on the original principal and interest payment of $1,520.06. Monthly savings = $0. Lifetime savings are calculated based on a new shorter term payoff given the added principal payments each month. For this example the loan will be paid off in 303 payments. Therefore, the total lifetime payments are calculated as 303 x $1,520.06 = $460,578.18. Total lifetime savings $50,161.98.
There are many ways to approach your home financing and no loan scenario is the same. As the cost of borrowing money remains low, each of us, as home owners must make the choice. Do I want to save money each month or can I capitalize on low rates and make my money work harder for me compared to my current loan? And of course, would my CPA approve…
Vice President of Mortgage Lending
o: 773.290.0480 – m: 773.851.1793 – f: 773.516.6740
Guaranteed Rate Inc
3940 North Ravenswood , Chicago, IL 60613 NMLS ID: 217419
IL – 031.0025979
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