How to Determine Whether You Should Refinance or Not…

San Diego MortgageThere is only ONE formula You need to determine whether it makes economic sense to refinance Your San Diego Mortgage.

One Variable:
– How long do You plan to be in Your home?
(No one really knows this exactly, but make a very educated guess.  Take some time on this and really think it through.  This is the figure that can alter the formula quite a bit, so the closer You get on this, the more money You will save.)

Once You determine the best guess for how long You plan to be in the home, the rest is just Math. We’re trying to optimize what it COSTS You to be in the home over the given period of time. Basically, You want to pay the least amount of money possible to live in the home for the time You plan to be there while factoring in the amount of equity You build along the way. After all, if You are leaving at a certain date, we need to factor in to the overall cost what You walk away with after the Sale. Sounds pretty simple.

OUR EXAMPLE:
You got a $500,000 mortgage for 6% interest exactly 3 years ago. The current balanced owed is $480,000. Your monthly payment with just principle and interest is $2,997.75 (You don’t need to factor in the Escrow payments since those will remain the same or virtually the same in these cases).

You now have an opportunity to Refinance for 25 or 30 years for 5%. Your best guess is that You will be in the home for another 10 years, based on the age of children, career plans, etc.
30-Year Payment: $2,576.74 ($421.01 in monthly savings)
25-Year Payment: $2,806.03 ($191.72 in monthly savings)
(All of these calculations are done assuming a No-Closing-Cost San Diego Mortgage Refinance.)

Here are Your options…

#1 – Stay put.
By keeping the current mortgage You have, over the next 10 years or 120 payments, You will spend a total of $359,730.00 on Mortgage payments and Your final balance will be $381,721.75. Using $480,000 as our starting point, this means You gain $98,278 in equity while paying $261,451.75 in interest. The Interest deduction value is calculated at 30% of the total interest paid. This is the financial benefit You get for being able to deduct the interest paid on Your mortgage when tax-time comes around.

Total of Payments: $359,730.00
Equity Gained: $98,278
Interest Paid: $261,451.75
Interest Deduction: $78.435.53
Remaining Loan Balance: $381,721.25

#2 – Refinance to new 30-Year Fixed at 5%.
Total of Payments: $309,208.80
Equity Gained: $90,507.99
Interest Paid: $218,700.81
Interest Deduction: $65,610.24
Remaining Loan Balance: $389,492.01

#3 – Refinance to new 25-Year Fixed at 5%.
Total Payments: $336,723.60
Equity Gained: $126,490.06
Interest Paid: $210,233.54
Interest Deduction: $63,070.06
Remaining Loan Balance: $353,509.94

In this situation, keeping the current Mortgage makes no sense. You lose so much money by staying put in this case.

Option #2 would be a better deal because You would pay over $50,000 LESS in total payments and only owe about $8,000 more on the home after 10 years. You are giving $8,000 later for $50,000 NOW… Wow, what a deal. You would be hard-pressed to make that much money with any method of investing in San Diego Real Estate.  Many people screw this up because they don’t want to “start the loan all over again at 30 years”.  Very costly thought process.

Option #3 is what I would do without thinking twice. This is the definition of a “NO-BRAINER” in the world of Refinancing. Any time You can do a shorter-term loan with a LOWER payment, jump on it right away. Tell Your Loan Professional to Lock the loan and process it immediately. Look at how much better of a situation this is…

You would pay $23,000 less in total payments over the 10 year period, which is nice for starters, but You also have about $28,000 more in equity! The other big benefit to Option #3 would be if You decided to stay in the Home after 10 years. This loan option is going to just get bigger and better savings vs. the other two plans as time goes on, so if that were in the realm of possibility, that could be another nice cherry on the Top of a delicious San Diego Mortgage pie.

I know most people hate Math and I’m a weirdo for loving it, so if You need help running the numbers or have any questions about how to make the most of YOUR San Diego Mortgage, just email below. It’s Free!

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About Derrick Evens, "Mr. Credit"
The K.E.Y. to getting ahead and staying ahead in this life is to Keep Educating Yourself. Knowledge will give you a better chance at Success and Happiness, but will ensure you make Smart decisions for you and your family. I work hard every day to help bring as much knowledge to as many people as I possibly can. Join me.

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