In recent years, we have had many conversations about refinancing a mortgage with historically low rates. In these conversations we have heard a wide variety of concerns. This month, we would like to explore one of those concerns; “I don’t want to start my mortgage over by refinancing into another 30 year mortgage.”
Historically, the data says that people either move or refinance their existing mortgage between every 3 to 5 years. Since the down turn of the housing market, we have seen those numbers start to increase. In fact, we have come across a lot of people who have had their current mortgage for 7+ years now. For those people, the concern of “starting over” is very real. This is because during the first 5 years of a 30 year mortgage, around 80% of your Principle & Interest Payments goes straight to interest.
There are a lot of great reasons where it actually makes more sense to refinance into a new 30 year mortgage instead of a shorter term mortgage, but that is a topic for another day.
Now let’s explore the benefits of a 15 year mortgage. Let’s assume that your original mortgage was opened back in 2006, with an original loan amount of $200K. Average rates were around 6.50% which would give you a principle & interest payment of ~$1264. Now, six years later, your principle balance would be $184,131 (assuming no additional principle contributions were made). If you keep paying on this mortgage for the next 24 years, you are going to pay an additional $179,940 in interest.
If you were to refinance that same mortgage into a new 15 year mortgage at 3.625%*, your new principle & interest payment would be ~$1334 or ~$70/month more than your current payment. While not a decrease in your monthly payment, consider what that small increase does to your mortgage.
Instead of paying an additional $179,940 in interest alone, you would only pay ~$55,105. That is a total interest savings of ~$124,834. Plus, your mortgage is paid off 9 years earlier, so that means you save 9 years worth of payments at $1264/month.
What would happen if you kept your existing mortgage and just paid an extra $70/month? You would pay off the loan about 2 ½ years earlier but you would still pay over $155,902 in interest or over $100K more than you would with the refinance.
If you would like to see how much the Kunselman Team could save you by refinancing your mortgage, 15 or 30 year, please give us a call. We would also like to remind you that if you have lost value in your home, there are still government programs that may be able to help save you money.
*Mortgage assumptions $185K Loan amount, 3.625% Rate 3.841% APR
