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Don't Reduce Your Payment With Low Mortgage Refinance Rates!
By EchoBay Loans Staff Writer

When mortgage refinance rates are low, many begin to calculate whether it is a smart decision to refinance their home. While many jump at the chance to lower their payment, it may not be the wisest decision in the long run. Thirty years is a very long time period and even on small loans, the amount of interest paid can be much more than the original loan amount. Many people are shocked at the amount of money they truly paid for their house when you calculate the amount of interest paid.

In the example used below, you will see that Ben and Mary will have paid $528,309 for their $200,000 home if they remain at the current interest rate. When mortgage refinance rates are low, it is almost always a smart move to investigate refinancing. This is particularly true if you plan to stay in your house for the term of the loan.

While saving on the monthly payment results in immediate savings, it will cost you more by the end of the term. When mortgage refinance rates are low, many times you can refinance for a shorter term while keeping your payments relatively the same. By cutting years from your repayment, you can save thousands of dollars in interest.

Let's look at an example:
Ben and Mary have a $200,000 loan amortized for thirty years. Their current rate is 8% resulting in a payment of $1,467 per month. At the current rate, they will pay $328,309 in interest charges over the life of the loan. As we said before, this results in paying $528,309 for a $200,000 home.

Let's assume that mortgage refinance rates for thirty-year loans have dropped to 6%. At this rate, if they refinance, their payment will drop to $1,199 per month, which is a savings of $268. The total interest payments on this loan will be $231,677, for a savings of nearly $100,000 over their current loan. But it is possible to save a great deal more just by shortening the length of the loan.

A fifteen-year mortgage refinance rate is generally lower than a thirty-year rate. Let's assume the mortgage refinance rates for fifteen years is 5.35% resulting in a payment of $1,618. While this increases the payment by roughly $150 per month, the interest paid over the life of the loan is now only $91,292.

If Ben and Mary decide they don't want their payment to increase as much, perhaps they could just shave ten years off of the loan. For a twenty-year loan, let's assume a mortgage refinance rate of 5.6%. This would lower their payment slightly to $1,387. Total interest paid over the life of the loan would be $132,901, which is still a substantial savings over the original loan and the refinancing option at thirty years.

  Original 30 year 30 yr. Refinance 15 yr. refinance 20 yr. refinance
Rate 8.00% 6.00% 5.35% 5.60%
Payment $1,467 $1,199 $1,618 $1,387
Total interest $328,309 $231,677 $91,272 $132,901

As you can see from the example, it pays to do some investigating into different terms when mortgage refinance rates drop. While it may be nice to have the extra money in your pocket each month from the decrease in payment, it could be much more lucrative in the long run to keep your payment the same and shorten the term. In the example above, the difference in interest paid between the original thirty year and the fifteen-year refinance is more than $237,000, which means Ben and Mary could theoretically buy their next $200,000 house with cash!

When reviewing mortgage refinance rates, investigate several different scenarios as we have done to enable you to make the best decision for your financial situation.


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