Should You Refinance Once You've Paid Down Your Mortgage Interest?
You know how you’ve been paying on your mortgage for well over a decade and now you’re finally starting to see a decent percentage of your payment go towards principal? And then, someone comes along to suggest you should refinance. It took you 15 years to finally start hitting your principal hard and chomping down that loan balance. If you refinance now, won’t you be setting yourself back and starting over with the highest percentage of your monthly payments going towards interest and lowest percentage going towards principal?
You’re thinking something like this:
A $200,000 mortgage loan at 5% interest, 30-year term.
Your 15th year in, you’re paying $6,950 interest and $5,933 principal.
You’ve come a long way from that first year of $9,932 interest and $2,950 principal.
You started off with less than 23% of your payment amounts going towards knocking down your loan amount and now more than 46% is doing that. You’re paying less interest than ever. Plus, you’re already half-way there. You’re at year 15 in a 30-year mortgage term. Won’t refinancing set you back as far as making high interest and low principal payments?
Yes, and no. Yes, your new loan (like every loan) will start with you paying the most interest you will ever have to pay during the life of that loan. Each month, you pay a flat amount for your mortgage payment, and gradually interest payments will decrease and gradually principal payments will increase. But no, you won’t be setting yourself back. A new
lower loan amount and new lower interest rate could save you tens of thousands of dollars. Let’s see how this could play out.
Your original loan:
A $200,000 mortgage loan at 5% interest, 30-year term.
By the end of your 15th year, you would have paid $129,023 interest with a loan balance of $135,767.
If you keep going the full 30-year term, you’ll pay an additional $57,487 interest.
That’s a total of $186,511 interest over 30 years; and your $200,000 loan will have costed you $386,511.
So, if you can refinance on better terms, that could prove to still save you a lot of money. Keeping with the same scenario; your current balance of your loan at the end of year 15 on your 30-year term, is $135,767. That’s the amount you need to refinance if it proves beneficial.
What if your new terms looked like this?
A $135,767 mortgage loan at 3% interest, 15-year term.
Your new loan’s monthly payment would be $136 less than the original loan.
By the end of the 15th year, your loan is paid in full and you would have paid $32,997 interest.
That’s a total interest savings of $24,490!
And it gets better.
If you kept on paying the same mortgage amount you were initially paying on that 30-year loan, you could knock off 2 years and 3 months and pay off your new mortgage loan in 12 years, 9 months. Plus, you would save an additional $5,366 in interest payments.
Conclusion
If you have enough equity in your home, and if you can find the right terms, refinancing could set you ahead. There are plenty of people and tools that you can use as resources to help you figure it out.
