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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5 Comments on "Saving $95,000 by Refinancing into a Lower Rate and Shorter Duration Mortgage"

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[…] by Andys2i · 9 comments var addthis_product = 'wpp-261'; var addthis_config = {"data_track_clickback":true};With interest rates on 30 year fixed-rate mortgage loans falling below 4%, the lowest level since the 1950s, many borrowers are keen to refinance their home loans and other mortgages. By any long-term measure, current rates are a great deal and could result in tens of thousands of dollars in savings over the life of the mortgage. However, getting these low rates (and big savings over the long term) is not so straight forward. Most banks are much stricter on their lending criteria and only those with excellent credit and equity in their homes will get access to these record low rates. Here are the some of the main considerations and hurdles you think about when refinancing your mortgage: […]

Gail

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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