Saving $95,000 by Refinancing into a Lower Rate and Shorter Duration Mortgage

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Many homeowners with good credit are ditching their old 30-year fixed rate mortgages for the 15-year or 20-year versions. This is primarily to leverage historically low rates for these shorter duration loans and benefit from the significant interest savings over the life of the loan. In fact, a friend of mine did exactly this when he refinanced his $395,000 remaining mortgage balance (original loan was $400,000) into a 20-year loan. He was able to get a lower rate (3.85% vs. the 5% he was currently paying) and will potentially save up to $147,000 in interest costs over the loan term. All he had to do was pay an extra $215 a month for the shorter duration (20-year) mortgage. His net savings, when you subtract the higher repayments from the interest savings, works out to about $397 per month, which is more than $95,000 of savings over the 20-year loan term.

Thanks to his good credit, he could have also refinanced into a 15-year mortgage with an even lower rate (3.65%) but felt the extra monthly payments of $706 would have stretched him and his family to thin. Besides the net savings over the term of the 20-year and 15-year loan mortgages was only marginal at about $11 p/month ($408 – $397). The table below provides details on the above calculations and shows why the shorter term/lower interest refinance options provide such a great deal. Thanks to a lower interest rate (5% vs. 4.5%), even the 30-year loan refinance option provides significant savings with a lower monthly payment relative to his current loan.

Refinance Calculation Table for shorter duration and lower interest loan

The morale of this story is that it is a good time to refinance if you can get a lower rate and afford potentially higher extra monthly payments. There are a number of lenders currently in the marketplace [See rates in your local area] offering ultra-competitive rates with little or no closing costs. Even if you are not actively looking to refinance, it is worth getting a few free quotes and running the numbers on how much you can save over the life of your loan based on lower rates and/or a shorter duration. The above table, which I did in Excel, can provide you with the general framework for comparing your options.

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{ 1 comment… read it below or add one }

Gail August 18, 2011 at 10:27 am

Love the calcs. Just one point, to get the lower rates your loan balance must be less than the conforming limits ($417,000 in most states) that the GSE’s will buy. Otherwise, as I found out, the rates are about 1% higher. Also, I recommend Quicken to start your search, they were really friendly and their customer service rep was a huge help in navigating the mortgage jargon.

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