Why you Shouldn't refinance your loan

Principal borrowed: $100000.00
Annual Payments: 12
Total Payments: 360
Annual interest rate: 6.00%
Regular Payment amount: $599.55

princpl//intrst//cum princpl//cum intrst//balance

105.16--494.39---1228.00-----5966.60---98772.00
111.65--487.90---2531.75---11857.45---97468.25
118.54--481.01---3915.92---17667.88---96084.08
125.85--473.70---5385.46---23392.94---94614.54
133.61--465.94---6945.64---29027.36---93054.36

This is the last payment of each year through the first five years. The first column is how much of that specific payment of $599.55 goes to principal. The second column is how much of that payment is interest. The third column is cumulative principle or "how much of your money has gone toward paying off that loan". The fourth column is how much you have payed the lender in interest to date, and the fifth column is the balance left on your loan.

So, at the end of five years you will have payed out $35,973, that is the total of columns three and four. Now, you still owe $93,054.36. Meaning you have payed the loan down by $6,945.64. Obviously, if you were to refinance now you will be throwing out $29,027.36 of your hard earned money. If you will notice that with every payment, more of your money goes toward the principle and less toward interest. This is the nature of an amortization schedule. As you get closer to the end of the life of the loan, more of your money is going toward the principle and not interest. interest is payed at the beginning of the loan.

If you are having cashflow issues, either you are having trouble affording your own home mortgage or you are not getting as much cash flow per month from your rentals, then you may consider refinancing your loan. Let's look into this with a little more detail.

So, you don't care about how much money you have paid out so far in payments. You are only concerned with the amount you are required to pay each month and you would like to lower that if possible. Right now is a good time to purchase or refinance. Rates are very low and so is the market.

I want to look at our previous example since we have already studied this amortizatoin table.

So, you are five years into this loan your payment is roughly $600 per month. the loan was origianlly for $100000 you. It is a 30 year fixed rate mortgage at 6% interest. Your current balance is $93,054.36.

Let's say you have the opportunity to refinance this loan at 5% interest.

First you have to consider there will be closing costs (about 4-5% of the loan). I am going to go with 5%. The loan will now be for $97,700. Your new payment will be $524.47. you will save $75.53 per month. Now you can imagine if you loan was originally a higher interest rate and a higher principle you could save a whole lot more per month in payments.

We still have to discuss is whether it is worth it or not. let's look at the numbers. I am going to explain to you how much it will cost you to borrow the original $100,000 and stick with your original loan and how much it would cost you in the long run by refinancing that loan.

First the orginal loan is going to cost you $115,838.19 in interest alone throughout the full 30 years. This is what it is costing you to borrow that money to buy the $100,000 house.

Now compare the interest paid after you refinance.
1) interest paid on first 5 years of original loan $29,027.36

2).Total interest on new lower rate mortgage (5%) with lower payment- $91,110.90

3). Add these numbers together and what do you find- total interest paid for that same house- $120,138.26

What does this mean? well, besides the fact that refinancing means that you won't pay off the loan until the 35th year instead of the 30th year; you will end up paying $4,300 more in interest even though you got the lower rate.

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