Should I Refinance My Mortgage Even if It Only Saves Me $50/Month?

by | BiggerPockets.com

Does it make sense to refinance your mortgage if you are only saving a small amount a month, like $50? The best way to answer this question is with an answer to another question.

Answer this question first: How long do you plan on keeping your property?

It’s best to try and answer this question because the answer will have everything to do with whether or not refinancing with a small monthly savings makes sense for you.

Many people refinance to lower their payment, which helps their overall monthly obligations. Others look to refinance in order to pay less interest over the life of the mortgage, since even a small reduction to the interest rate can mean savings tens of thousands over the long-term.

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Let’s Look at an Example

If you are in a position where you don’t need the monthly savings to help your monthly obligations, then you should apply that savings to your new mortgage. If you apply the monthly savings to your new mortgage principal balance, it has a tremendous benefit to your term.

Let’s use the example of a 30-year mortgage with a balance of $150,000 that was taken out about a year ago, at an interest rate of 4%. The new mortgage rate would go down to 3.5% and reduce the monthly payment $77.81.

Normally, a $77.81 monthly savings wouldn’t make sense to most people, but the trick is to apply that to your new payment. Doing this will reduce the term just over 5 years! Yes, that is like turning your mortgage into a 25-year term. Most people don’t realize that they should look at refinancing, even if the monthly savings is very small. Applying even the smallest amount to your mortgage will reduce the term and pay it off earlier.

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Related: Should You Refinance Your Mortgage? Consider This.

Conclusion

Does it make sense to refinance your mortgage, even if you are only lowering your payment a small amount? Absolutely! If you plan on keeping the property for a long time, just applying a small savings to the new mortgage payment will reduce the term, pay less interest, pay off the mortgage sooner, and build equity faster.

Would you refinance your mortgage in this case?

Let me know your thoughts with a comment!

About Author

Mark Fitzpatrick is a mortgage banking veteran and real estate investor who blogs about mortgage financing and related topics at MortgageMusings.com. You can follow Mark on Google+ or on Twitter. NMLS #382064.

14 Comments

  1. Ronald Perich

    You should consider how much the closing costs will be before making the plunge. But I agree that lowering payments is a good thing. And if you can swing a lower payment and a shorter amortization period, even better. Someday, maybe take out a home equity and buy an investment property to help pay off your primary residence!

  2. John C.

    It doesn’t always make sense. You could end up paying more in closing costs than you realize. It could take you years to recoup thousands of dollars at $50 of savings a month.

    Also, just because it’s lowering your monthly payment doesn’t mean it’s cheaper. You may end up saving $50 a month, but you’ve just started another 30 year loan.

    A good way to compare the old loan vs the new loan would be if you could lower your monthly payment, roll your savings into the new loan to make the new monthly payment the same as the old, and end up paying off the new loan in shorter amount of time than the old.

    So, you’d save on the monthly, and you’d end up paying off the loan faster.

    In addition, you’d need to calculate how many months it would take to recoup the closing cost.

  3. Jerry Kisasonak

    I think everyone’s situation is different, so I don’t believe it’s prudent to attempt to give a blanket answer to the “Should I refinance” question.

    People see refinancing as a benefit when their loan’s interest rate is higher than the current average. But that’s just a surface observation, and it doesn’t take into account other factors that could make refinancing a step in the wrong direction.

    What many people are failing to consider is HOW INTEREST IS PAID. By studying an amortization schedule and tracking the part of their payment that goes directly to the principle, someone can quickly determine that the further along they are in the loan term the more of the payment is hitting their bottom line. To suggest a refi when someone is well along in a loan is to suggest to reset the amortization schedule – which is advantageous only to the lender – not the borrower. “Saving money on interest” in this case is simply a sales pitch by the lender to write a loan, not good advice.

    I recently took over a loan – bought the home subject to the existing mortgage. The loan has a very high rate in today’s standards – 9.75%. Why would I even want to do this? Well, the loan has around 7 years left of payments, and a very large portion of those payments are going directly to principle. I could easily refinance the loan down around 5%. But why would I? To “save interest”? No! A refi would only cost me interest, shifting my “almost all principle” payments to “almost all interest” payments.

      • Jerry Kisasonak

        I’m not sure exactly what you’re getting at with this statement.

        Loan payment A is $1,000/mo and $900 goes to principle and $100 to interest because you’re well along in the loan term.

        Loan payment B is $1,000/mo and $100 goes to principle $900 to interest because it’s a newer loan. I would MUCH rather be in loan A.

        Both loans require $1,000/mo payment, but how those payments get allocated to the loan principle and interest is different. Sure, in both cases you can makes additional payments directly towards principle, but even at that I’d rather be in loan A which would make the actual principle payment $900+additional principle payment versus loan B’s $100+additional principle payment.

    • Deanna Opgenort

      Jerry, I don’t think those amortization tables mean what you think they do. By year 7 you’ve paid off about 1/2 the loan,
      You are looking at the charts and imagining that somehow you are getting in at the tail end of a larger mortgage, but in reality YOU are simply taking on a 7 year mortgage at 9.75% on an amount that is about 1/2 of what the original loan was (if you run the numbers on a new 7 year 9.75 loan for the amount you assumed, you’ll come up with a number that is remarkably similar to your mortgage payment….)

      When you look at those tables, at the beginning of a 30 year loan the portion of the payment that goes to interest is higher—BECAUSE YOU OWE MORE MONEY. You are paying the interest on ALL of the outstanding loan. There is nothing magical or special about being at the end of the mortgage, you simply owe less money, but your payment is fixed.

      Using your favorite amortization tables, try this;

      $50k/ 7 yr/ 9.75% =$824/mos, $69,184 in total payments, TOTAL INTEREST $19,184 (paid in 84 months)

      $50k/ 7 yr/ 5%=$707/mos,$59,362 total paid, TOTAL INTEREST $9,362 (paid in 84 months) so, saving $9,822 in 7 years by refinancing.

      But wait – there would be refinance fees, right? so let’s put some of those in — I think 10% is high but let’s try it anyhow;

      $50k + $5k fees & points/ 7 yr/5%=$777/mos, $65,299 total payments, TOTAL INTEREST AND FEES $15,299 (paid in 84 months)
      So, even if you paid 10% in fees, in this example over 7 years you’d STILL save $4k by refinancing at the lower rate.

      The only way I see that you are ahead by assuming this loan is if there would have been a boatload of expense in appraisals, origination fees, & points to refinance (about 14% of the loan would be the break-even point).

      • Jerry Kisasonak

        Hi Deanna,

        Thanks for your reply. I think this may have become more complicated than it needed to be. Let’s look at a simple example:

        $100,000 loan at 5% interest on a 30-year loan. Here’s how the amortization schedule looks at Payment #1, Payment #180 (half way/15 years in), and Payment #360 (final payment):
        Payment #1: Monthly payment: $537. $417 Interest $120 Principle.
        Payment #180: Monthly payment: $537. $283 Interest $254 Principle.
        Payment #360: Monthly payment: $537. $2 Interest $535 Principle.

        In my mind there IS something magical about being later in the term of the loan. The PAYMENT AMOUNT itself remains the same, but that amount is actually hitting the principle goes way up because much less is coming out for interest. At the beginning of the loan most of the static payment amount is going towards interest. Towards the end of the loan most of the static payment amount is going towards principle.

        My point is that not all mortgage payments are equal based on this fact. Lenders will always try to rope you with the “Well your payment will be about the same as you’re paying now” sales pitch. They tempt you start the whole cycle again, and remain forever on the debt treadmill.

  4. Don’t forget to also factor in any applicable changes in mortgage interest deductions. And in Jerry’s scenario above of assuming a loan with only 7 years left on the loan, how much equity did he pay the seller? His example would infer he didn’t pay any equity…

    I agree that any blanket statements regarding refinancing can paint a very misleading picture. Each scenario should be carefully weighed. I also agree with the statement that any refi most certainly benefit lenders but not necessarily borrowers.

    • Jerry Kisasonak

      Thanks Michael. No payment was made for equity. In this case, the owners pulled a Chase HELOC out and were able to get much more than what I believe the home was even worth. Of course, this was done when lending was much looser than it is today. So much of the payments they made were basically to get the loan down to the actual real-life value of the home – aka what a ready, willing and able buyer would actually pay for it. It had some equity in it when I took it over, but not what you’d think based on the fact that the loans was well along in years.

      • Deanna Opgenort

        Still not buying that it’s better to keep a 9.75% if you can get a 5% on the same amount because of “how far along” you are in the loan. I think the problem is that you are comparing a “new” loan ($100k) with an “old” loan (only $50k remaining) and somehow thinking amortization is the magic. It’s really just the smaller loan amount that is the magic.

        Pretend you took over at 7 years left of a $100k loan ($50k left), and you are paying 9.75% interest.
        Pretend I start a BRAND NEW 7 year 5% mortgage that is the same amount ($50k).
        If we make identical payments ($824), who will be finished paying off first, and why?
        (hint; if we start today, I’ll be done Dec 2022, you’ll be done Jan 2024…)

        Yes, there is psychology (many people won’t make more than the minimum mortgage payment & they’ll squander the extra), but I also assume most BP folks are smarter than that. I think most loans you are pretty free to pay down early without penalty.

        • Jerry Kisasonak

          To each his own I guess Deanna. Maybe I just have a warped sense of refi’s because I’ve personally seen so many people use properties like ATM’s (some in the name of lower interest rates), until there was a shift in the market and they found themselves underwater – and then blamed the market for their situation. I’m sort of old fashioned in that I think it’s horrible to take money from someone that you promised to pay it back – and then to just walk away from that commitment with some excuse ready. But I know in today’s society this practice of “Just give it back to the bank” is all too common.

          Also in my example I did nothing to qualify for the existing loan, I didn’t have to incur any fees to acquire it, and it doesn’t even show up on my credit report. So to refinance would be to make that go away, which I’m not at all motivated to do.

  5. Deanna Opgenort

    There are two issues– one is a math problem, the other is a psychology problem,
    & I do agree on part of what you are saying –during the bubble too many people would refi then blow the extra $ living like the Karsashians, then walk away from the wreckage. I did come across the term “Refinance-To-Prepay” in an article that talked about doing a refi at a lower rate, but continuing to make the old, higher payment, which is more what I was talking about by doing a refi.

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