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Rate and Term RefinanceYou may heard this term before, and it is obviously different from a cash out refinance. There are two ways to lower the payments on your existing home mortgage. Once is to refinance into a lower rate, and the other is to change the term of the mortgage. Both will reduce your monthly payments by itself. Put them together and watch out, much saving will result. Let's explain the difference.Refinance into a lower rateIf you have a $400,000 home loan with an 8.00% rate on a fully amortizing 30 year fixed mortgage, your principal and interest payment will be $2,935 per month. If you refinance this loan into a lower rate, let's say 6.5%, then your monthy payment goes down to $2,528. You just saved yourself $407 a month by signing a few papers. That's like getting a $7,200 a year raise at work (roughly adjusted for taxes). You can then either save that extra money for retirement or pay off your equity a little quicker.Refinance the term of your loanLet's say you had the same $400,000 mortgage at 8.00%. Except you have been making payments on it for 10 years. Your payment is still $2,935 per month like in the example above, but after making payments for 10 years, your balance now is $350,898. If you now refinance the loan at EXACTLY the same rate of 8.00%, you have changed the term from 20 years (you've paid on it for 10 years), back to 30 years. It is a new loan, and therefore it is 30 years long. Now your new monthly payment is $2,575, a monthly savings of $360 a month! Who says you have to wait for a lower rate to lower your payment? The reason why this works is that your new loan is $350,898 over 30 years, not $400,000 over 30 years. (Not allowing for closing costs rolled into the loan). Okay, hold your breath....What if we do both a rate AND a term refinance?Rate and term refinanceLet's use the same numbers. A $400,000 loan amortized over 30 years at 8.00% with a monthly payment of $2,935. You paid on it for 10 years, and your remaining balance now is $350,898. Rates have gone down, and you decide to refinance. Your new rate is 6.5%, but you not only refinanced the rate, you also reset the term from the 20 years that remained on your old loan back to 30 years on your new loan. Guess what your new payment is going to be? $2,218!! With a few strokes of the pen, you saved yourself a whopping, hold your breath, $717. A month!!. That's $8,604 of after tax income a year ladies and gentlemen. Adjusted for taxes, roughly $11,000 of gross income. That's like giving yourself almost a $1,000 a month raise. Why would you not want to do it?It depends on what is most important to you. Is it more important to get your home paid off quicker, or is it more important to have money left at the end of the month? You decide. If you can invest that monthly savings and get a 10% rate of return on your investment, you increased your net worth many times over by doing the rate and term refinance. If you went ahead and bought a new boat and a new car with your new found monthly payment savings, you just made yourself a lot poorer. Get a free financial analysis and see how much you can save by doing a rate and term refinance by registering to have lenders call you with a mortgage quote. |
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