When is It a Good Idea to Pay Money to Refinance

Paying Money to Refinance

Thankfully, the economy is showing signs of recovery. More people have found stable employment and news from the housing market is encouraging. However, the mortgage rates are still incredibly low and some people are still on the fence about refinancing. People that have the ability to pay down their mortgage in order to get a really good rate are wondering if it is a good idea. Here is a simple example, with lots of numbers, to help you understand when it is a good time to use your own money to pay in to a refinance.

Current Mortgage Proposed Refinance
Interest Rate 6.00% 4.50%
Term 30 Year Fixed 25 year fixed
Loan Amount 230,000 200,000
Home Value 240,000 250,000
Payment $1,378.97 $1,111.66
Amount to Pay 30,000

In this example we are assuming that the homeowner has lived in the home for 5 years, thus the reason for the new 25 year fixed term.

As you can see, the new payment is lower than the old loan by $267.31 per month. Seems like a small amount considering the $30,000 that was paid out to get the loan down to 80% of loan to value. However, let’s now compare the total payout of the two different loans

Current Mortgage Proposed Refinance
Payment $1,378.97 $1,111.66
Remaining Years of payments 25 5
Total of Payments $413,691 $333,498
Plus Money Paid in For Refinance -0- $30,000
Grand Totals $413,691 $363,498
Difference $50,193

As you can see, paying down the mortgage by $30,000 resulted in $50,193 less payments. That is a 167.31% return on the money. Not too shabby!

Each situation is different. However, generally speaking, if the new interest rate is at least 1% lower and the term is the same or lower, then the total payback will be substantially lower.

Many online mortgage calculators will help you crunch these numbers with all kinds of scenarios. You simply need the accurate data about your existing mortgage and a solid interest rate quote on the new loan. From there you can see how much you can save by paying money in to the refinance.

Contact us below or apply online to see if you qualify for a Refinance Mortgage!
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Filed under: Refinance Loans, Wisconsin Blog

Luke Skar

Luke Skar is the web developer and content strategist for Inlanta Mortgage in Madison, serving Wisconsin, Illinois, Minnesota and Florida. Guided by his 12-plus years of various mortgage marketing experience, Luke provides top-quality SEO services, effective social media management, and web development and maintenance. Luke’s career in the mortgage industry began back in 2001, as a loan processor. After becoming a loan officer for a number of years, Luke is now the sole owner/operator of madisonmortgageguys.com. To ensure that all the information he posts is fresh, accurate, and up-to-date, Luke relies on the knowledge which his years of dedication to keeping up with the constant change that the mortgage industry provides.


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