| I've been getting this question a lot lately, and mostly | | | | Let's say you and your family plan on buying a new |
| because of how low the interest rates have been. | | | | home in about 1 year, but are looking into refinancing |
| The general rule of thumb most of us have heard is to | | | | into a lower rate because the rates are so low. Using |
| reduce your interest rate by 1% or more. Well, this isn't | | | | the example above, you are saving $125.46 every |
| always the case, because what's more important is | | | | month, so the total amount of monthly savings over |
| how much interest you will be saving and how long | | | | the next year is $1505.52. If the closing costs for the |
| you will have the mortgage. | | | | refinance is $2000, most people would think it's not |
| Here is an example of a person reducing their | | | | worth it. Why should you pay $2000 to save $1505.52 |
| mortgage interest rate by 1%: | | | | for that year? Well, at first it may seem like that, but |
| Current Loan Details: | | | | don't forget about how much you are saving on the |
| - $200,000 loan balance | | | | interest as well. |
| - 6% interest rate | | | | Using the same example above, the amount of |
| - 30 year fixed rate | | | | interest you pay over the first year of your current |
| - $1199.10 monthly payment (principal & interest) | | | | loan is $11,933.19. The amount of interest you pay over |
| - $231,677.04 is the total amount of interest that will be | | | | the first year of you new loan is $9,933.00. That is an |
| paid over the 30 years. | | | | interest savings of $2000.19 over that one year. |
| New Loan Details: | | | | Most people tend to forget how much interest they |
| - $200,000 loan balance | | | | save when they lower their mortgage interest with a |
| - 5% interest rate | | | | refinance. Yes, it's nice to recoupe the closing costs |
| - 30 year fixed rate | | | | with the amount of savings every month, but the total |
| - $1073.64 monthly payment (principal & interest) | | | | amount you have to pay back to the lender in interest |
| - $186,513.24 is the total amount of interest that will be | | | | is just, if not more, important when looking to refinance. |
| paid over the 30 years. | | | | Most people go to Mortgage Advice Credit Advice for |
| These are the two major benefits for doing this | | | | additional advice about refinancing their mortgage. |
| refinance: | | | | Don't forget to check own credit report before looking |
| | | | at refinancing. If you already know what kind of credit |
| 1. The monthly payment is reduced by $125.46 | | | | you are working with, this gives you a bit more |
| 2. The total amount of interest saved over the 30 | | | | leverage when trying to negotiate the best interest |
| years is $45,163.80. Wow! | | | | rate available. Checking your credit report before hand |
| Now, this example is best followed if you plan on | | | | is also good for those that don't' have the best credit, |
| having your current mortgage for all 30 years. The | | | | because then you can focus on working on fixing the |
| reality is that most of use will either move and buy a | | | | credit report. |
| new home or refinance again sometime in the future. | | | | Your goal is to do whatever you can to pay the least |
| So, an important thing to ask yourself is: "How long do I | | | | amount of interest on the largest loan you will probably |
| plan on keeping this mortgage?" | | | | have your entire life. |