Many homeowners think refinancing is a way to lower their monthly mortgage payment, but there’s another strategy that can maximize their savings. By refinancing into a lower rate and keeping the same monthly payment, you can pay off your loan faster. Let’s walk through an example:
Let’s assume a borrower has the following mortgage terms:
- Current loan balance: $400,000
- Current interest rate: 6.5%
- Loan term: 30 years
- Current principal & interest payment: $2,528/month
If interest rates drop and this borrower takes on new loan terms:
- Loan balance: $400,000
- New interest rate: 5.5%
- New loan term: 30 years
- New principal & interest payment: $2,271/month
This results in savings of $257/month. If the borrower continues to make their previous mortgage payment on their new loan, we can break down how rapidly their loan amortization will occur:
| Loan Scenario | Monthly Payment | Payoff Time | Total Interest Paid | Interest Savings |
| Stay with old loan (6.5%) | $2,528 | 30 years | ~$511,000 | — |
| Refinance at 5.5% & pay the new amount | $2,271 | 30 years | ~$417,000 | ~$94,000 |
| Refinance at 5.5% & keep paying $2,528 | $2,528 | ~24 years | ~$314,000 | ~$197,000 |
By continuing the habit of making the old mortgage payment, five years will be removed from the mortgage loan term, saving approximately $173,000 in interest over time.
With any additional payment contribution, the extra payment is applied towards the principal balance. This results in paying off the home sooner, the loan balance decreasing faster, and less interest compounding.
What to Consider
- Closing Costs: Refinancing can come with closing costs. It’s important to determine that the money you save is more than what you spend to refinance, which can be identified through a cost-benefit analysis.
- Financial Flexibility: If your budget is tight, you can always drop down to the lower payment when needed.
- Your Goals: If your priority is to lower your monthly payment, stay with the lower payment. If your goal is long-term savings and to pay off your mortgage sooner than scheduled, keep making the higher payment.
If you have further questions, please contact our office at (760) 930-0569 to speak with one of our Mortgage Loan Originators.
