The Myth of “Starting Amortization Over” When Borrowers Refinance – Save the Savings!
I received the below email from a borrower this week:
“I’m about 3 years into my current loan, and am looking into another refi.
My monthly payment savings will be about $400 per month.
How do you figure out the savings overall when you consider a new loan will cost about $80k in additional interest b/c I am staring my amortization over by taking on a new 30 year fixed? I know this because I just looked at an online amortization schedule.
Over 30 years, my $400 per month in savings works out to a total of $144k of savings (if I just compared payments).
BUT, do I calculate my net savings by subtracting $80k (of extra interest I am paying) from the $144k to get just $64k of net savings over 30 years?
Is that right or am I confused?
I know all of this assumes that I hold the current loan for the next 27 years but I really don’t have plans to move which is why I am truly thinking long term on these loans.”
SAVE THE SAVINGS!
My answer to this question is to always remind borrowers to “save the savings.”
If the above borrower invests her $400 per month savings and earns a meager 5% return on average over the next 27 years (the amount of time left on her current loan), she will have $273,000 in savings at the end of 27 years.
Keep in mind that her loan balance on her new loan will be about $75,000 at the end of 27 years (the date at which her current loan will be paid off).
So, she could pay off her remaining loan balance at the end of year 27 and still be about $200,000 to the plus – solely b/c she refinanced and saved her savings.
The other obvious benefit from “saving the savings” is the added liquidity for rainy day events or other needs such as medical bills, accidents, college expenses, job loss, home repairs, etc.
Founder/Broker | JVM Lending
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