Interest rates have come down recently and a lot of people are thinking about refinancing. However, I’ve been having a lot of conversations with homeowners who are cross-shopping for the best rates, and there have been moments where I’ve looked at the numbers and let them know that it actually doesn’t make sense for them to refinance.
It’s strange how a lender can massage the numbers and make substantial savings appear when there’s not much of a benefit in the end. If someone’s in a 30-year loan and they’ve been paying it off for years, they owe less money in interest. Because they owe less money, the payment on a lower loan amount is calculated. As a result of the principal and interest being lower because of the lower loan amount, the monthly payments appear more substantial than they really are.
If you’re looking at refinancing, the only statistic you should be paying attention to is interest savings. How much interest are you saving? Quite often, when someone rolls their loan amount back into a 30-year term, they have to start paying more and more interest right off the bat, instead of paying the principal amount off. Your monthly payment might be lower, but I’ve found that if someone has been paying into a mortgage and refinances to a shorter period, the savings on interest over the life of the loan outweigh the savings on a 30-year loan more often than not. By switching to a shorter term, you’re paying much less in interest per payment, and you’ll leave with a substantial amount of equity in the home down the line.
On the flip side, if you’re looking to downsize down the line, this strategy still works. The only time you want to stretch out your loan and lower your payments is if you’re in dire financial straits.
If you have any questions about your specific situation or anything else related to the mortgage world, don’t hesitate to give me a call or send me an email. I look forward to hearing from you soon.