This video is going to give you a simple formula to determine if it's worth it
for you to do a refinance on your current mortgage. First thing we need to look at
is why are refinances even offered? Why would the bank allow you to refinance at a lower rate
when they already have you locked in at a higher rate? And it's because they do make money off of
them. So it's not always going to be worth it for you to refinance your home mortgage.
Hey guys, I'm Tim Wolffe, if you're new to the channel go ahead and SUBSCRIBE
so you can see more personal finance videos. So the reason banks offer a refinance option
is because you can either do it through your own bank or you can go and find a new lender.
So they want to stay competitive and not have you go and find a new lender that's going to
make all the interest off of you. So that's one reason why your own bank or your own lender would
offer you a refinance. The other reason why they do it is because it can be profitable for them
because they charge a closing cost fee to do a refinance on your mortgage. This is what helps
them not lose a ton of money off of people that refinance to such a lower interest rate.
Also people will do cash out refinances or start a new 30-year loan when they go ahead and refinance
which means if you're already five years into a 30-year loan and you restarted at another 30 years
that's going to be longer that the bank is going to have the loan with you, which means that's more
interest they're going to make off of you. First thing you need to do is figure out how much it's
going to cost for you to refinance either through your own lender that you have the loan with now or
try to find two or three other lenders and see if you can get a more competitive lower fee
closing cost. On average it's going to cost around $5,000 to refinance your mortgage. Now beware some
companies will offer you "no closing cost fee", well really what they're doing is they're just
rolling that $5,000 fee into the mortgage itself. So there's still a fee that they're charging you
they're just not advertising that you have to pay it up front. Which is fine, it's not a bad thing
to roll it into the loan but you have to be aware that that's going to be an extra amount of money
that you're going to have to pay back and you need to know how much it's going to be. The other big
factor you have to think about is how long are you actually going to stay in the home you're
living in. On average the average american home buyer stays in a home for approximately 10 years.
Now if you're younger, if you live in a city, or this is your first home that you've ever bought
it's probably going to be less than 10 years. If you're older in age or you live in a more suburban
area and this is not your first home you're probably going to stay in that home longer
than 10 years. But only you know an estimate of how long you're going to stay in your home. So
now we have those two things decided you need to figure out how much do you owe left on your
mortgage. Now the average home prices, I'll list here, it varies tremendously depending on where
you live. If you live in San Francisco or you live in Idaho the average home price is going to be
completely different. So whatever it is that you owe on your mortgage you need to figure that out.
For this example I'm going to use $200,000. So someone who has a $200,000 mortgage that they're
currently paying off or $200,000 left on their mortgage and they have an interest rate of 4%
that first monthly payment of interest is gonna be $667 in just interest alone. The way you calculate
this is you take your balance that you owe, the $200,000 times .04 on your calculator because 4%
is the interest rate. Or if you have a 3% interest rate you do $200,000 times .03. Take that number
and then you divide it by 12 and that is going to be how much you owe in that particular month.
Now obviously as the balance goes down, as the two hundred thousand goes to a hundred
and ninety thousand... hundred eighty thousand... hundred and fifty thousand... 4% of that is going
to be less than what it was when it you owed two hundred thousand dollars. After two years you're
no longer going to be paying $667 in interest per month, you're going to be paying closer to $650
in interest. So it doesn't change drastically. I'm not going to overwhelm you with all these
sort of calculations and numbers... but just keep in mind that the more you pay
off your mortgage (more principal you pay off) the less you're obviously going to pay an interest.
And let me address one thing a lot of people say "Oh the first couple years are just all
interest anyway" or there's such things as like "front loaded" loans. It's not actually true,
I see where they're getting it from but that's not... the bank doesn't look at the amount of
interest that you pay over the course of 30 years and go hey we're going to charge most of that
on the front end of the loan. if you have a 4% interest rate you're getting charged 4% from the
very beginning, to the very end. Now obviously 4% of $200,000 is going to be a lot more than 4% of
$20,000 when you're in your last couple years of the loan. So yes in the beginning of the loan you
will be paying more money and interest but they're not... it's not because they're front loading
the interest it's just the balance that you have to pay off is more money.
Now let's compare that to $200,000 dollars that you owe with 2.5% interest rate which is about
where interest rates are right now. So if you're looking to refinance to that you would pay your
first month about $417 in interest. Compare that to the $667 that we were paying before at the 4%
interest rate. So now we are saving $250 a month in interest by refinancing from a 4% to a 2.5%.
Keeping in mind like I've been saying this entire time, the less you owe on your mortgage- the less
interest you're going to pay. So after 10 years you might not be saving $250 a month, you might
be saving more like $210 to $220 a month. Now we're going to compare that to the cost of how
much it is to refinance. So if it was a $5,000 refinance fee and you were saving $250 a month,
it would take 20 months for you to get back to where you were for you to make up that $5,000.
So a little over a year and a half. So if you plan on staying at that house for let's say two
years or more then it would be worth it in this scenario for you to refinance because you're
going to recoup your money in about 20 months and when you hit that two-year mark you're going
to start saving $200 to $250 a month by doing the refinance. Now if you plan on moving in two years
or you're really not sure, maybe three years, maybe two, it's probably not even worth the
hassle. But if you know you're going to be in this house for three to five years or more and you're
going from a 4% to a 2.5% interest rate then yes in this scenario it would make sense. And let's
look at the savings you would have over the entire life of the loan. So if you were to do a $200,000
loan at 4% over the course of 30 years you would end up paying a $143,739 in interest alone.
If you do $200,000 at 2.5% you'd be paying $84,487 in interest. So almost a $60,000 dollar savings in
interest by having the lower rate but keep in mind you haven't been paying the lower rate the entire
time if you're refinancing you may have already owned your home for 5 years and you've been
paying interest for 5 years at 4%. Because you've probably paid around $38,000 in interest so far.
But here's what I want you to take away from that- that's a lot of numbers, the key thing here is the
sooner you refinance the more money you're going to save. Also if you refinance to a lesser length
loan either a 20-year loan, 10-year loan, or 15-year loan you're going to save so much more
money. If you go from a 30-year and you refinance to a 15-year, not only are you going to save on
the interest rate but the amount of time that you're paying interest for. You're probably going
to save upwards of $50,000 in interest alone or more. So it's key if you can refinance to a lower
length term that's where the real savings is going to be in addition to the lower interest rate.
In conclusion I'll put it this way, if you think you're going to refinance from a 30 year to a
lesser term like a 20 or a 15 year loan and you're going to save about 1% in interest it's probably
worth it for you to go ahead and refinance as long as you're not going to move within the next year
or two. And if you have any questions or you want me to calculate it for you go ahead comment down
below your exact numbers and I'll figure it out for you whether it's worth it or not. If you've
got anything out of this video please go ahead hit the LIKE button guys I will see you next week!