Is even doing a refinance worth the trouble and cost? It is more often than you realize.

Look at your refinance as an investment. The saved interest and payments as the yield, just like you do with any other investment you make. Many times, people say to me that they would like to get a better rate on their mortgage but don’t want to pay the closing costs associated to get a loan done, or they don’t want to start another 30-year term. Here is an example to look at:

Mr. and Mrs. Simmons bought their home five years ago and financed $200,000 at a 5.5% rate. They know they can get the rate down to 4.25% but are hesitating because of the cost of the loan (~$4200) and the thought of starting on a 30-year loan. They doubt it’s worth refinancing to a better rate.

In the last post we took a look at saving $100/month by getting a better rate, and investing that $100 every month. This time we are not going to invest the monthly savings when showing the numbers. Here are the real numbers:

Current Loan - $200,000 @ 5.5% ($1135.58 Monthly Principal & Interest)

Total Interest for 360 months $208,808.08

Interest paid in 60 months ($53,903.44)

Interest pending for 25 years $154,904.64

Proposed Refinance - $184,633.18 @ 4.25% ($908.28 Monthly Principal & Interest)

Total Interest for 30 years $142,349.16

Total interest savings $12,555.48

Not a bad return on an investment of $4200. So you can see that even adding back 5 years on the mortgage The Simmons' will still pay less interest.

Remember the $227.30/month saved as well? How long would it take to pay off other debts like car loans and credit cards with the $227.30 you just freed?

- Applying $127.30/month extra to the new mortgage, and spending the other $100 shaves 67 months off the new loan and $34,605.58 in saved interest.

- As we saw in the last post, the savings could be invested every month, creating a possible return of $35,088.38 in 10 years in this case (see below).

Interest over the long term is a powerful thing, especially when used to your advantage.

John Lyng is a Mortgage Loan Officer with Supreme Lending. He is experienced with traditional bank programs, as well as alternative programs to help people get into their home. John has a varied background in working with mortgage banks and non-profits, and believes in guiding families to prepare for affordable homeownership.

If you have questions about this or any mortgage-related topic, please contact John Lyng directly at 214-862-3579, or send an email to John.Lyng@SupremeLending.com.