Examples Chart

As mortgage interest rates edge downward, many homeowners wonder if it’s the right time to refinance their present home loan.   Under the right circumstances, refinancing can save you money and possibly cut the length of your mortgage. There are several ways to save money:

• If you can lower the interest rate you are currently paying, you may be able to save money on interest costs over the life of the loan.
• If there is a large enough difference between your present interest rate and the interest rate at which you intend to refinance, you may want to consider shortening the term of your loan.
• If you decide not to go with a shorter loan term, you could still use the money you save through a lower interest rate to prepay some mortgage payments, which will also cut the length of time you pay on your home loan.
• Many people presently have equity in their home (the difference between the value of your home and what you owe). You could use that equity to pay off higher interest loans such as credit card debt, which could significantly lower your overall interest costs on debt.
• Remember that, for most home loans, the interest you pay is tax deductible. That isn’t true for interest paid on credit card debt or other consumer debt. It’s always a good idea to check with your tax advisor to determine your eligibility for tax deductions and to calculate how much you could save by consolidating debt using your home’s equity.

Your situation will determine how to use refinancing

Exactly how you use refinancing to save money depends upon many factors, such as:

• Your present interest rate compared with the rate at which you can refinance.
• How long you have been in your present home (and thus, how much you have already paid on your mortgage).
• How long you intend to stay in your present home.
• Your budget:

  1) If you have room in your budget, it may be possible to refinance your 30-year mortgage to a 15-year loan. While your monthly payments will likely be larger, you can save big money over the term of the loan.

  2) By refinancing at a lower interest rate, yet staying with a 30-year loan, you can reduce your monthly payments, which can be very helpful to many budgets.

  3) If you have the discipline, you can save the difference between your present monthly payments and the payments you’ll have under a refinanced mortgage. If you take those savings and periodically make extra loan payments, you can shorten the length of time it takes to pay off the loan.

   The chart below shows just one example of how you could save money by refinancing your current mortgage loan.

Assumptions: You financed a $100,000 home 3 years ago at 8.5% interest, using a 30-year loan. You would like to know how much you could save by refinancing using either a 30-year loan term or a 15-year loan.

This example shows a substantial monthly savings when refinancing to the lower rate at a 30-year term. However, a greater amount of interest is paid over the life of the loan. The ideal savings would be to refinance to a 15-year term.

CLOSING COSTS: Many members wonder about the "break even point" when it comes to closing costs. Closing costs vary, but if we start with the example above, and add $2,300 closing costs to our 30-year refinanced loan, then the new monthly payment increases to $716 and the monthly savings is reduced to $53. The time required to "break even" on these closing costs would be 3.5 years ($2,300 divided by $53 = 43 months).

Please note: A complete analysis will take into account all elements that may affect your decision. Call our Real Estate office today at (407) 647-8252 for a complete analysis of your refinancing options. Rates may change daily.

Check with your Credit Union for advice  

For more information about home lending, call our Real Estate office today at (407) 647-8252.