How I’m Saving 22% to 42% On My Mortgage Interest Through Refinancing

by Kevin on February 9, 2012

How would you like to chop your mortgage interest cost down by 22% to 42% from your current plan?

That’s exactly what I’m doing. Read on to learn exactly how I’m going to be able to save that much.

Low Mortgage Rates for Refinancing

Can mortgage rates seriously get any lower?

A few years ago a good rate was in the low 5% range. Then getting into the high 4% range was a great rate. But as the economy struggled on and the Federal Reserve kept pumping money into the economy. Even if you bought a house less than a year ago and got what you thought was a great rate, the refinancing rates now make it attractive enough where you can save thousands in interest over the life of the loan. Interest rates for both 30 and 15 year fixed rate mortgages are in the 3% range. That is incredibly low. It’s almost unbelievable.

How Much Can I Save On Refinancing My Mortgage?

I’ll use myself as an example of how much a refinance could save you right now.

My wife and I purchased our home last summer. That’s only 7 or 8 months ago. At the time we decided to go with a 30 year mortgage to give ourselves added flexibility over a 15 year mortgage. We planned to send in additional principal on the loan every month as if it were a 15 year mortgage. This solution would cost us a few thousand dollars over the next 15 years because of the rate being higher on a 30 year than a 15 year. We were willing to sacrifice those dollars to get additional flexibility in our budget if we ever needed it.

Just a few months later and we could still benefit from a refinance. Rates for 30 year mortgages are averaging 3.85% nationally. You can get 3.18% on average for a 15 year mortgage. Wow.

In our case, here’s how the math breaks down:

Our original 30 year mortgage with no extra principal payments would run almost $150,000 in interest over the life of the loan.

If we were 100% consistent with our extra principal payments, we would knock the total interest down to about $64,000. A total savings of around $85,000. (By the way, how many times  can you say “Yes, I just saved $85,000…”!) We would pay off the mortgage in just over 14 years, knocking more than 15 years off the life of the loan. That’s a big win.

However, with the new mortgage rates I’m thinking of dropping a few thousand dollars on the closing costs. If we got a 3.875% rate (more likely than 3.85% since rates are done in 1/8th increments) and didn’t pay extra on the principal our total interest would drop to $121,000. Less than the original mortgage but more than our current plan by almost double; that doesn’t make sense. It would be better to stick to our current plan.

But let’s see what happens if we don’t change our monthly budget and pay the same amount we are paying now (normal payment plus added principal)?

Now that 3.875% rate looks attractive. By keeping our monthly payment the same our total interest would drop to about $50,000. Now we’re talking — a savings of around $14,000 off of our current plan. That’s enough to buy a nice used Honda once you take the closing costs out of the savings.

But if we stretched just a little bit further and went with a 15 year mortgage and the incredibly low rates of around 3.125%? The cost savings jump even further. If we refinanced today and didn’t pay an extra cent in added principal payments our interest cost drops almost $20,000 to $44,500. Again, if we decided to keep our budget the same and send in the same amount anyways we can really chop that cost down. By how much? Oh, by about $27,000 to a total interest cost of $37,000.

That’s crazy talk.

Here’s a table to better explain:

RateAdded Principal?Interest CostSavings Over Current Plan% Savings Over Current Plan
Current Plan4.625%Yes$64,000N/AN/A
Refinance to 30 Year3.875%No$121,000($57,000)(89%)
Refinance to 30 Year3.875%Yes$50,000$14,00022%
Refinance to 15 Year3.125%No$44,500$19,50030%
Refinance to 15 Year3.125%Yes$37,000$27,00042%

When Refinancing Makes Sense

Now before you rush out to your mortgage broker or loan officer to see if you can jump in while the rates are low, let me give you a word of caution. Refinancing your home doesn’t always make sense. If you refinance today and move three months from now, you’ve just wasted thousands of dollars.

However, refinancing makes sense when:

  1. You plan to live in the home for a long, long time. Think 10+ years.
  2. The cost of refinancing is outweighed by the savings you get in either your monthly payment going down or your total interest costs going down. This factors into #1. If you spend $2,000 to refinance but it only saves you $10 per month in payments, it is going to take you 200 months (almost 17 years) to “repay” yourself the closing costs.
  3. You are in good financial shape and the out of pocket costs of closing on a refinance wouldn’t be better spent in paying down a high interest rate credit card or some other debt.

That’s pretty much it.

So are you like me? Does refinancing make a lot of sense for you right now? (For the record, I haven’t gone through with it just yet, but the math above is simply too compelling to ignore. It’s not often you can save $27,000 in one financial decision.)

{ 1 comment }

Zack Jones February 14, 2012 at 6:08 am

We recently refinanced our house and dropped our rate from 6% down to 4%. We did the 30 year loan which is what we’ve always had. We thought that was the normal thing. We know better now. Even though we get offers almost daily to refinance down in the 3% range we just shred them. My wife and I are following Dave Ramey’s baby steps (thogh I plan to swap 15% into retirement with paying off mortgage) I already have $335,000 in company 401(k) and contribute 5% to get company match so I am putting something into retirement. Our current plan is to have all debts paid this year, emergency fund fully funded in 2013 and starting Jan 2014 adding an extra $2,000 per month to our current mortgage payment. That should get our house paid off in about 4 years assuming of course we can stick to the plan, etc. Once the house is done I’ll go back to maxing out the 401(k) and start investing in the company offered Roth 401(k) as well. If all goes according to plan 2026 retirement will be no problem.

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