Sometimes it’s hard for homeowners to know when it is a good time to refinance your high rate mortgage. Normally, “if a client can save at least one percent on their interest rate or more than $150 on their mortgage payment then I advise them that those are my thresholds for knowing you have a good deal” says Stephen Khan, Mortgage loan officer in the Phoenix, Arizona area. When rates are low it pays for a homeowner to explore every opportunity to put some money back in to their pocket and to save on the total interest paid over the life of a loan.
Sometimes it helps to see real numbers from a loan scenario that may be similar to yours. This often helps folks relate the numbers to their own mortgage situation to bring clarity to what otherwise might be a difficult decision. Let us share some mortgage numbers on the potential savings when refinancing your high rate mortgage.
How much can I save in interest costs by lowering my mortgage rate?
We use an example that may be typical of the loan amounts and financial scenarios that are found in any community in America. Our example uses a fictitious family but using real mortgage figures on a home with a 30 year fixed rate mortgage with a loan amount of $250,000 at an interest rate of 6% and a monthly principal and interest payment of $1,498.88. The total interest paid if the homeowner pays the mortgage on schedule for 30 years is $289,595.
Using that same scenario, if the homeowner would choose to refinance their high rate mortgage then the interest savings can be tremendous. Using the same loan amount and mortgage term, but dropping the interest rate to 4% will lower the homeowner’s monthly mortgage payment to $1,193 and reduce the total interest paid to $179,673.
The savings by refinancing this mortgage loan are as follows:
Monthly payment savings: $305 per month/$3,660 per year
Total interest Savings over the life of the loan: $109,922
Yes we know the scenario is simplified because we used a 30 year term and no homeowner will ever refinance a 30 year loan on the day they take out the loan from their lender. But for simplicity sake, the numbers are easy to understand when presented in the format that we used, and there is no arguing with the dollars saved by lowering one’s interest rate!
How much can I save in interest costs by shortening my Mortgage term?
Using the same principles as in the above scenario we will change our starting numbers ever so slightly to reflect what we as mortgage loan officers see on a daily basis when meeting with clients. We will use a loan amount of $250,000, interest rate of 5% and a monthly payment of $1,461 on a fixed rate loan with 25 years left to pay since in our example the homeowner has paid on the loan for 5 years already.
If a homeowner chooses to refinance their mortgage to shorten the term and lower the rate to market interest rates the lifetime interest cost savings are well worth the time to do the refinance. If the homeowner refinances to a shorter 20 year term and lowers the mortgage rate on the loan to 4% the total interest savings over the life of the loan are dramatic.
Total interest paid with 25 years left to pay: $188,442
Total interest paid if the mortgage term is shortened to 20 years: $113,588
Total Savings: $74,854
As any responsible homeowner who makes sound financial decisions can see, taking advantage of lower mortgage rates makes complete sense in terms of the money that can be saved over the long haul. Don’t pass up on the opportunity to refinance if you find yourself in a similar situation.
This article “Refinance your High Rate Mortgage to Save Thousands in Interest” was written by Stephen Khan, a mortgage loan officer in the Phoenix, Arizona area. If you would like to know more about mortgage refinancing please visit the Home Mortgage Loans website to learn more.