When to refinance your mortgage

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When to refinance your mortgage

Category : Refinance

April 23, 2016 by Naseer Siddique

I have been a mortgage broker for more than 29 years as of this writing. During this time, I have arranged mortgages for people from all walks of life and seen mortgage rates drop from around 12% to about 3%. What has prompted me to do this little write up is to address the following preconceived notion by many borrowers –

“I am trying to pay-off my mortgage. I took out a 30 year mortgage, “X” number of years ago and have only “Y” number of years left to pay it off. If I refinance, the “X” number of years I have already paid will go to waste and I will be starting all over again”. 

A quick answer to the above myth is:

“It is always financially rewarding to refinance a mortgage at a lower rate, regardless of how many years you have left to pay-off your mortgage even if there is only one year left”.

There is however, one condition. You must NOT have paid or incurred any non-recurring closing costs to refinance your mortgage. Now let me explain and let’s try to understand the justification for the above statement.

Let’s assume that you took out a 30 year fully amortized loan for $300,000 at 6% in May, 2005. This would translate to a $1798.65 per month payment. After making payments for 6 years (72 payments), the principal balance left on this loan will be $274,193.95. At this point (May, 2012) you have an opportunity of refinancing your mortgage on a 30 year fix fully amortized program at an interest rate of 3.875%. You decide not to, because by doing so the loan will reset and not get payed-off for another 30 years. TRUE and NOT true depending upon how you manage your payments after the refinance.  Continuing with the example above:

If you don’t refinance: Total amount paid for the remaining 288 (360-72) payments left on the current loan = $1798.65X288 =$518,011.20 and the loan will be paid-off in April, 2035.

If you refinance: New monthly payment will be $1289.36. Total amount paid over 30 years will be $464,170.19 saving you $53,841.01 over the life of the loan.

As I had said earlier, it is always wise to borrow money at a lower interest rate, regardless of the loan amount or the time remaining on your existing mortgage. When refinancing a mortgage, one has to decide what is more important to the home owner –lowering the monthly payment (cash flow reasons) or paying-off the mortgage either sooner than the time remaining on the current mortgage or having a lower payment AND also pay-off the mortgage in the same time as their current mortgage term i.e in our example the remaining 288 months. The comparison is best explained and summarized in the table below for our example above. As is evident from this table it is really a no-brainer.

“If paying-off the mortgage sooner is your main goal then NOT to refinance is the biggest mistake you can make that works against the very goals you have set for yourself”.

From the table below and for our example’s sake, if you do not refinance, you will pay $518,011.20 over the remaining life of your loan and pay-off the mortgage in 288 months. On the other hand, if you refinance, and continue to make about the same payment as you are making now, you can save a whopping $139,453.99 in interest payments AND pay-off the mortgage 5 years and 4 months sooner. Need I say more………..?

No Refinance continue with same mortgage$1,798.65288$518,011.20April, 2035$0.00
Refinance and pay the new minimum payment$1,289.36360$464,169.60April, 2042$53,841.60
Refinance and adjust payment to pay-off by April, 2035$1,463.85288$421,588.80April, 2035$96,422.40
Refinance but keep making about the same payment $1,794.11 211$378,557.21Dec, 2029 $139,453.99


About the author

PersonalNaseer Siddique is a mortgage loan broker with Lakeshore Financial Inc in San Jose, California. He holds a Master’s degree in Computer Engineering and has been originating home refinance and purchase loans for over 29 years.  He can be reached at info@lakeshorefinancialinc.com or by calling (408) 896-4249.