This is a guest post from Terry Henson.
With the subprime mortgage market collapse,
and bankruptcies of the big institutions, lenders across the US have
tightened their lending guidelines making it harder for homeowners to refinance their loans. Borrowers face a decline in real
estate prices meaning that some home owners end up with less equity
in their homes. Self employed borrowers also face challenges as it’s
harder to meet today’s qualification scores.
On the other hand there are homeowners
who do not refinance by choice. If you are one of them, read this article,
as it may help you understand the potential savings you might be missing.
Mortgage Refinance and Break Even
If you have refinanced before, you are
likely familiar with the “break even period”, whereby you should
stick to the new mortgage for at least as long as it takes to cover
the closing costs with the new mortgage savings. Once the closing costs
are covered, you start to truly save money. You may be at a loss if
you refinance without covering the costs, so wait until you hit that
break even period to least be even.
Although you may read and hear advice
that past refinancing costs should not affect your decision today –
be careful about the advice you take. If you spent $5000 on a refinance
a year ago, and only saved $3000 so far, you have $2000 more to go to
It likely only makes sense to refinance
now if your interest rates are considerably lower (2 points or more),
and you know that you will stick to the mortgage for at least the next
few years, to cover costs from the first and second refinances.
Refinance Without Closing Costs
Some banks and lenders swallow the refinance
costs and offer lower rates to existing clients with a great financial
profile in order to retain business. If you get an offer like that from
your loan officer, you may want to take it, even if you refinanced several
months ago. When you are not paying for a mortgage
refinance you can do it as
often as you like.
Interest and Principal Payment Allocation
As you know you must pay an interest
charge on mortgages. What you might not know is that you mostly pay
an interest first, and only then cover the principal. Here’s how the
first 3 months of a 30 year mortgage look, in comparison to the last
Mortgage: $ 300,000
Interest Rate: 5.5 %
Length: 30 years
First 3 Months
|1||$ 300,000.00||$ 332.21||$ 332.21||$ 1,359.50||$ 1,359.50|
|2||$ 299,667.79||$ 333.72||$ 665.93||$ 1,358.00||$ 2,717.50|
|2||$ 299,334.07||$ 335.23||$ 1,001.17||$ 1,356.49||$ 4,073.99|
|1||$ 5,029.50||$ 1,668.93||$ 296,639.42||$ 22.79||$ 308,995.92|
|2||$ 3,360.58||$ 1,676.49||$ 298,315.91||$ 15.23||$ 309,011.15|
|2||$ 1,684.09||$ 1,684.09||$ 300,000.00||$ 7.63||$ 309,018.78|
As you can see the difference is drastic.
On the first payment $332.21 paid in principal and $1,359.50 in interest.
On the last payment $1,684.09 paid in principal and only $ 7.63 in interest!
The question you might have if you had
the same mortgage for a while – “Wouldn’t I be paying mostly for
the interest again, only reducing my balance by a fraction in comparison
Only if you take a mortgage for the same
length you originally did. So if your mortgage was for 30 years, and
you refinanced for 30 years again, than the payment will look similar
to the table above. The solution is to take a mortgage for a shorter
term, like 25, 20, 15 years on so forth. The principal deduction will
be larger than your original, longer loan.
is a contributing writer at Kanetix.ca, who offer various financial
rate comparison services to Canadians from coast to coast including
refinance quotes from competing
lenders. Canadian home owners who wish to reduce their monthly mortgage
payments or take out home equity for various other purposes, can benefit
by shopping many rates at the same time.