Since my last posting I’ve received some calls asking me for examples of the math for calculating if it’s a good idea to refinance. Here is a recent example of one I did for a client.

Outstanding mortgage is $244,000 @ 4.9 % amortized over 40 years. Over the 5 year term of the loan the buyer would have paid $1155.72 per month and after 5 years would have paid $12,079 off the principal and paid $57,264.37 in interest. They were advised by the bank the penalty would be $13,000.00.

At first glance it is a no brainer it’s not worth it right! Wrong, if the client remortgaged at 3.65% over 40 years. The would pay $964.37 a month payments on the loan and  paid $15,490.20 off the principal paid $42,372.36 interest or $14,892.01 less in interest minus the $13,000 penalty you still save $1,892.01.

Now if you kept your payment the same at the new rate, you would really save money. First you would reduce your payment period (amortization) by TWELVE  years to 28 years. You would pay $41,272 (or $2,992 less than the original even with the penalty) in interest and $28,141 off your principal in the first 5 years.

This entry was posted on Thursday, March 18th, 2010 at 8:01 am and is filed under Keith Macdonald's Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.