To Refi, or Not To Refi? That is the Question!

By
Mortgage and Lending with PS Mortgage Lending 305-791-4874 or 888-845-6630 365768

During the refinance (refi) boom 6 years ago, many Mortgage Brokers sold clients on the idea of refinancing to lower their payments and/or rate and possibly cash out.  We all know the outcome of the cashing out part of that equation, but most people never look at why you should rarely refi to lower a rate or a payment.

On a $200,000 mortgage over 30 years at 6%, you will pay $231,000 in interest on top of the original 200k.  Most people think that this 216k interest is spread out, when in fact you pay most of it in the first 10 years.  So here is a scenario that comes across my desk with great frequency:

BORROWER: "I owe $193,000 with 20 years left on what used to be a $220,000 loan at 8% and my payment is $1,600.  I want to take advantage of the low rates and drop my payment as well."

MORTGAGE GUY: "OK, so adding closing costs, lets say your new loan amount is $200,000 at 6% you will drop your payment to $1,200.  And $400 savings over the next 20 years (240 mos.) is an $96,000 savings Mr. Borrower, what a fantastic savings!"

But let's look at what is REALLY going on!

Mr. Borrower has already paid $166,000 in INTEREST alone on his current mortgage, and is due to pay $231,000 more on the new mortgage.  So that's a total of $397,000 in interest paid, as opposed to a total of $361,000 if he were to continue with his current mortgage payment.  So he actually loses $36k and doesn't save the $96k (all supporting figures in graph below).

I know these rates aren't realistic for today's market, but those even numbers worked well for the example.  There are people who want to drop their current 5.5% or 6% rate to 4.5% and it's not always the right choice.  They need a Mortgage Professional to truly show them what is really going on with the numbers.  For some people, the lowered payments are an absolute necessity.  For them, this is worth it, but for those who can afford their current payment and simply want to save money, then this is not the route for you. 

Summary

Principal borrowed:

$200,000.00

Regular Payment amount:

$1,199.10

Final Balloon Payment:

$0.00

Interest-only payment:

$1,000.00

*Total Repaid:

$431,676.00

*Total Interest Paid:

$231,676.00

Annual Payments:

12

 

Total Payments:

360

 (30.00 years)

Annual interest rate:

6

.00%

Periodic interest rate:

0

.5000%

Debt Service Constant:

7

.1946%

*Total interest paid as a 
percentage of Principal:

115

.838%

         

Summary

Principal borrowed:

$220,000.00

Regular Payment amount:

$1,614.28

Final Balloon Payment:

$0.00

Interest-only payment:

$1,466.67

*Total Repaid:

$581,140.80

*Total Interest Paid:

$361,140.80

Annual Payments:

12

 

Total Payments:

360

 (30.00 years)

Annual interest rate:

8

.00%

Periodic interest rate:

0

.6667%

Debt Service Constant:

8

.8052%

*Total interest paid as a 
percentage of Principal:

164

.155%

         

Year 1:

Pmt

Principal

Interest

Cum Prin

Cum Int

Prin Bal

1

147.61

1,466.67

147.61

1,466.67

219,852.39

2

148.60

1,465.68

296.21

2,932.35

219,703.79

3

149.59

1,464.69

445.80

4,397.04

219,554.20

4

150.59

1,463.69

596.39

5,860.73

219,403.61

5

151.59

1,462.69

747.98

7,323.42

219,252.02

6

152.60

1,461.68

900.58

8,785.10

219,099.42

7

153.62

1,460.66

1,054.20

10,245.76

218,945.80

8

154.64

1,459.64

1,208.84

11,705.40

218,791.16

9

155.67

1,458.61

1,364.51

13,164.01

218,635.49

10

156.71

1,457.57

1,521.22

14,621.58

218,478.78

11

157.75

1,456.53

1,678.97

16,078.11

218,321.03

12

158.81

1,455.47

1,837.78

17,533.58

218,162.22

Year 9:

109

302.54

1,311.74

23,541.22

152,415.30

196,458.78

110

304.55

1,309.73

23,845.77

153,725.03

196,154.23

111

306.59

1,307.69

24,152.36

155,032.72

195,847.64

112

308.63

1,305.65

24,460.99

156,338.37

195,539.01

113

310.69

1,303.59

24,771.68

157,641.96

195,228.32

114

312.76

1,301.52

25,084.44

158,943.48

194,915.56

115

314.84

1,299.44

25,399.28

160,242.92

194,600.72

116

316.94

1,297.34

25,716.22

161,540.26

194,283.78

117

319.05

1,295.23

26,035.27

162,835.49

193,964.73

118

321.18

1,293.10

26,356.45

164,128.59

193,643.55

119

323.32

1,290.96

26,679.77

165,419.55

193,320.23

120

325.48

1,288.80

27,005.25

166,708.35

192,994.75

 

 

Phil Stevenson Mortgage...

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Information and content in this blog is original to Phil Stevenson

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Phil Stevenson

PS Financial Services

Owner and Principal Mortgage Originator

Certified Reverse Mortgage Professional (CRMP)

LO #365768

NMLS #968090

Cell: 888.845.6630

Miami Mortgages & Florida Mortgages

Copyright © 2013 by Phil Stevenson & PS Financial Services, LLC

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Rainer
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Phaedra Hubbard
My Florida Home Store - Clearwater, FL
Clearwater, Dunedin, Palm Harbor Real Estate Exper

Thanks for the info Phil!

Jul 17, 2010 03:06 AM #1
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Harry F. D'Elia
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If it makes sense to refinance for a lower rate and lower payment, just do it.

Jul 17, 2010 03:21 AM #2
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