When Refinancing Consider Your Life Of Loan Costs!

December 30th, 2016

refinance-math-brian-martucci-getloans-blog-1Refinancing doesn’t save you money unless you calculate in the interest that you’ve already paid. Especially when you think you’ll own the house for the long haul or forever. If you pay $2,500 a month in principal and interest, you are going to pay $900,000 over the life of a 30-year mortgage. If you are 4 years into the loan and are going to refinance to a principal and interest payment of $2,800 you are going to save $200 a month, correct? Wrong! For the first 4 years, you had the original loan you paid $120,000 at $3,000 a month and for the next 30 years after a refinance at $2,800 a month you’ll pay $1,008,000. Your life of loan cost is $1,128,000! This is $228,000 more than if you had simply left your original loan alone and not refinanced!

It sounds like your current loan started at around $406,000. If your rate is at 4.25%, this would mean you have a principal and interest payment of $1,997/month. The rest would be taxes and insurance, which should not enter the discussion since those figures won’t change with the refinance.

It seems like the lender you are talking to is proposing a new mortgage of around $400,500 which would include most of the closing costs. At 3.75% that is a principal and interest payment of $1,854/month (not including taxes and insurance). (Don’t forget that interest rates can go up, too. But that’s a different example.)

The difference between $1,997 a month and $1,854 a month equals the $143 a month in savings that they are talking about.

The cost comparison between the old and new loan is:

The new loan has total payments of $667,719 with interest of $267,219.

The current loan has total payments of $719,018 with interest of $313,018.

So, at first blush, it looks like if you hold the property forever you save decent money over time. But the other lender forgot to calculate that you’ve already made payments for a year.

So, in reality, the cost of the new loan is:

Total payments of $667,719 with interest of $267,219

+ first year’s payment on current loan of $23,967 with interest of $17,100.

Since you are re-starting a new loan, you’ll have the loan for 31 years not 30; the total would be a total of $691,686 with interest of $284,319.

So, your actual interest savings would be the difference between the interest on the current loan if you keep it of $313,018, and the total interest cost of the new loan plus the one year interest that you have already paid which totals $284,319; and that difference is $28,699.

That is a savings $28,699 or $79 a month over the term of the loan. The closing costs are over $4,000 so it takes 50 months to recoup the closing costs.  Some lenders sell refinancing without discussing the accurate mathematical analysis.

Schedule a call with me to talk about the financial benefits you might get from refinancing.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.​

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