When to Refinance

Hi Everyone, I just wanted to do a post about refinancing your mortgage.
The start of a new year is a great time to do a financial check-up!

Interest rates are hovering near record lows. In most cases, it makes sense to refinance your mortgage to pay off higher rate unsecured debts.

Here is an example of why it makes sense:

You have a $300,000 mortgage at 3.5% interest and have 3 years left in your term.

Your payments over 25 years are $1,497.81 per month.

And the penalty to break mortgage is $4,000.

You also have $20,000 in credit card debt at 18% interest with minimum payments of 3% of the balance per month. ($600 per month)

TOTAL MONTHLY PAYMENTS on the mortgage and credit cards:
$1,497.81 + $600 = $2,097.71 per month.

Over the next 3 years on the mortgage you pay:
Principal paid: $23,834.05
Interest paid: $30,026.51

Over those same 3 years on the credit cards you pay:
Principal paid: $8,392.62
Interest paid: $11,162

Which means over the 3 years you pay on both the mortgage and credit cards:
Principal paid: $32,226.67
Interest paid: $41,188.51

NEW:

You refinance your mortgage to include both the penalty and the credit card debt:
$300,000 mortgage + $4,000 penalty + $20,000 credit cards = $344,000

The current rate on a 5 year fixed rate (60-day close) is 2.89%.

By keeping your new mortgage payments the same as your old mortgage payment and credit card minimum payment ($2,097.71) means you are now paying the mortgage off over 17 years and 5 months, and your total monthly payments are the same as before.

Now, over the next 3 years, you pay on your mortgage:
Principal paid: $47,677.67
Interest paid: $27,609.49

So, by refinancing, even with the pay out penalty, you have paid $13,759 LESS interest over the 3 years and $15,341 more principal – $4,000 penalty = $11,341 Principal over the 3 years.

And again your total monthly payments have not changed!

ANOTHER EXAMPLE:

Let’s say lowering your total monthly payments is a big priority:

From the example above we have shown that currently:

TOTAL MONTHLY PAYMENTS on the mortgage and credit cards is:
$2,097.71 per month.

And over the 3 years you pay on both the mortgage and credit cards:
Principal paid: $32,226.67
Interest paid: $41,188.51

NEW:

By combining the mortgage, penalty, and credit card debt into one mortgage at 2.89% amortized over 30 years:
Your monthly payments: $1,426.82.

And over the next 3 years, you pay on the new mortgage
Principal paid: $22,653.81
Interest paid: $28,711.71

Which means by refinancing:
you pay $12,476.80 LESS Interest over the 3 years
AND
You save $664.89 per month in payments = $23,936.04 over the 3 years.

By lowering your payments you do end up paying $2,717.77 less principal over the 3 years than before. But the interest savings makes up for that.
Which means you are still ahead by $9,759.03 over the 3 years!

Everyone’s situation is different. Whether you are looking to become debt free faster, lower your overall payments or both, we can help.
If you do want us to run your numbers for you please let us know!