Our Thoughts

Real Estate: Refinancing and Mortgages – Part 2

By Troy Toureau, Branch Manager, McLean Mortgage Corporation

In the first part of this series we talked about making better refinance decisions by considering long-term finance objectives.  For example, it is easy to consider refinancing if you can lower your rate and your payment a significant amount.  On the other hand, this is not necessarily the right decision for everyone.

What if one could use the lower rate to shorten the term of their mortgage?  Ordinarily refinancing will increase the term of a mortgage. For example, if a homeowner obtained a 30 year loan three years ago and refinanced today, they would be increasing the term from 27 years to 30 years.  However, if they are lowering the rate, they could also opt to decrease the term at the same time.  Let’s take a hypothetical example. (Note that all rates and payments in this example are for example purposes only and are approximate.   In addition, the issue of closing costs for each option are not addressed.)

$300,000 Present Mortgage
5.0% Rate
Principal and Interest Payments of $1,610

Let’s say rates have dropped and the homeowner has the three hypothetical options. The following chart demonstrates these in terms of payment reduction or increase as well as term reduction or increase—


Present Loan


Rate

APR


Term

Principle & Interest
Payment


Change

Term Change

Interest Savings

Present Loan

5.000%

5.057

30 year

$1,610

N/A

N/A

 

Option One

3.500%

3.532

30 year

$1,347

-$220 monthly

+36 months

 

Option Two

3.500%

3.502

20 year

$1,739

+150 monthly

-84 months

$104,280

Option Three

2.625%

2.681

15 year

$2,018

+440 monthly

-144 months

$156,400

 

Which is the best alternative in this situation? It depends upon the financial situation of the homeowner and that is why a financial advisor is an important ingredient within the process.   The answer for someone who is 30 years old and someone who is 50 years old could be completely different.  Variations in income levels, cash reserves, retirement objectives, and more are all considerations.   

In next week’s post we will look at an additional objective which might be achieved through refinancing – paying off consumer debt.  

If you have any questions please contact Troy Toureau of McLean Mortgage Corporation.