I know many people (including me) that have refinanced recently and lowered their monthly payments. However, not the entire reduced payment amount is real savings. Some of the lowered payment comes from stretching out the term on the loan. Below are the details of my recent refinance this spring:
Chris’ Mortgage Refinance:
Old Mortgage
Interest Rate: 5.875%
Amount Owed: $267,000
Monthly Payment: $1845
Terms: 30yr Fixed
Payoff Date: 2035
New Mortgage
Interest Rate: 4.875%
Amount Borrowed: $267,000
Monthly Payment: $1413
Terms: 30yr Fixed
Payoff Date: 2039
Lowered Monthly Payment: $432
Savings: ???
By refinancing it appears that I “saved” $432 per month, but how much did I really save?
New Mortgage (Shortened Term)
Interest Rate: 4.875%
Amount Borrowed: $267,000
Monthly Payment: $1412 $1671 (Includes $258 of principle payments to keep the same loan payoff date)
Terms: 30yr Fixed
Payoff Date: 2039 2035
Monthly Savings: $432 $174 ($432-$258)
In reality I was already making extra principle payments on the original loan to pay it off by 2026, which is 30 years from the date I bought my house. I recommend that you follow the same strategy when you refinance so that you do not inadvertently spend extra money by extending the period of your loan.
So be careful when you refinance. Although you will save, don’t use the opportunity to borrow more by extending your loan term. Make extra principle payments or save/invest that amount for retirement.