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Refinance to a 15 year term?

If mortgage rates make refinancing seem favorable, a common question is, "should I save money on the interest rate even though I am starting my mortgage over from the beginning?"

The good news is that you can have your cake and eat it too!

Lets look at an example. Assume a borrower obtained a $200,000 mortgage 4 years ago. Now say that interest rates have declined, offering them the ability to save 1% on the interest rate. The remaining balance is about $192,000. They are thinking about refinancing because they will save $189 per month. The only negative here is that they will be starting from the beginning on their mortgage payments and will now have 4 additional years before the loan is fully paid (30 years on the new mortgage instead of the 26 years on the current loan). The borrowers like the savings, but wonder how they will ever get out of mortgage debt.

Some lenders suggest going to a 20-year term or even a 15-year term to solve this dilemma. The problem with either of these potential solutions is that the new payments will actually be higher than the original mortgage loan. In most cases the borrowers main objective is to reduce their monthly payments.

I have even heard and read many so called "sages" claim it is not worth refinancing because the sum of the payments for the new loans 30-year term will be greater than the sum of the payments on the current loans remaining 26-year term. This is a ridiculous argument and one that has prevented many borrowers from saving substantial dollars. Worse yet, some "crackerjack experts" say that since you are deeper in the amortization schedule there is some mystical transition that occurs. They claim you should be forced to pay a higher rate so not to give up the "magic" of the mid term amortization. They may also be the authors of emails that tell you to pass the Spam on to everyone you know in the next 45 seconds and you will get a check in the mailyeah right. The fact is that the savings of $189 per month could have been invested or utilized to created significant value.

But there is an even easier and safer way.

How do we solve this problem? The solution is surprisingly simple. Instead of refinancing the remaining balance of $192,000, the borrower should refinance the original loan amount of $200,000. At the time of closing, the borrower receives a check for $200,000 and pays off the old mortgage loan of $192,000. This leaves the borrower with $8,000 extra cash at the time of closing. The borrower then immediately pre pays the new mortgage by the $8,000 cash they now have in hand. By doing this the new mortgage loan has a remaining time frame of exactly 26-years! The sacrifice is that the monthly savings is reduced from $189 to a still respectable $138.

Paying a lower interest rate will save you money unless the closing costs to get the lower rate are too great to be recovered in a reasonable timeframe.

If you already have an excellent rate on your first mortgage, I have extensive information available on home equity loans and a home equity line of credit as well

As a Certified Mortgage Planning Specialist, I offer an analysis of your situation today can make suggestions on how small changes in how your consumer and mortgage debt is structured today can have a life changing effect in the years to come.  Read more about this free, no obligation service.


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