Have you taken advantage of lower interest rates and refinanced your mortgage? While you have lowered your monthly payment, your total interest costs may be higher! Assume the example below is a mortgage taken out in January of 2005:
Loan Amount Years Rate Payment Total interest
$250000 30 7.5 % $1,663.26 $348,769.07
Four years later (January 2009) the current balance of the mortgage would be $238,686.18 Do you realize you have paid over $68500 in interest in those 4 years? Here’s the math: $1,663.26 X 48 months = $79,836.48 minus $11,313.82 in principal reduction = $68,522.66. Now let’s refinance the $238,686.18 balance at 5.5% for 30 years. The new monthly payment is $1,355.23. Look at the mortgage:
Loan Amount Years Rate Payment Total Interest
$238,686.18 30 5.5 $1,355.23 $249,200.00
The total interest on the refinanced mortgage is $249,200 for 30 years. But remember, you have already paid $68,522.66 in interest over 4 years on your original mortgage. Your total interest costs will be $317,722.66 ($249,200 plus $68,522.66) over 35 years! Obviously you have lowered your monthly payment by $308.03, but you have increased your total interest costs and will be in debt 4 years longer.
What would be the result if you refinanced but continued to make your ORIGINAL payment of $1,663.26 on the NEW loan?
PLAN 7: REFINANCE BUT CONTINUE MAKING ORIGINAL PAYMENT
Loan Amount Years Rate Payment Total Interest
$238.686.18 30 5.5 $1,663.26 $151.285.08
By prepaying on the refinanced loan, the loan will be paid off in 19 years and 7 months and your interest costs will only be $151,285.08. Add to the $151,285.08 the $68,522.66 from the original mortgage and your total interest will be $219,807.74. This is about $129,000 less than if you did not refinance, and $22,000 less if you refinanced but did not prepay!!
As you can see, if you are comfortable with your old payment and refinance, the savings are incredible!
Save Even More Money After Refinancing