The most simple and common way many people measure the value of a Virginia mortgage refinance is by the difference in payments you will be making after your refinance closes.
That can be wrong and very deceptive.
For instance many borrowers refinance to improve their cash flows by reducing their minimum payment that must be made each month. That’s out of necessity, desire or some combination of both.
That’s okay. There are times we all would like to pay less each month. Maybe there’s a big tuition bill or a repair or maintenance issue that occurs unexpectedly. For instance I had a roof leak recently. A few weeks later my water heater was doing strange things. It happens. Was I doing anything differently to cause these unexpected repairs. No. Would I have liked to skip a mortgage payment or made a lower one in lieu of the repair expense? Absolutely!
Refinancing a Virginia Mortgage
You must look at the true savings which is the difference in the interest rates, the delta if you will, between the old loan(s) and the new mortgage which replaces them.
Let’s take a look at an example to illustrate this point…
An original 30 year fixed rate mortgage of $300,000 at 5.0% would have a minimum principal and interest payment (PI) of $1,610.46 per month. This does not include taxes, insurance or mortgage insurance (MI). After ten years has gone by the existing balance is $244,026.94 assuming all scheduled payments were made in a timely fashion.
Let’s say we can get a mortgage rate of 4.00% for your new mortgage loan for a thirty year term. Your actual rate will depend on your credit score and loan-to-value among other factors. To not complicate things we will use the balance from above although that would require cash to close for the normal closing refinance. The PI payment for a $244,026.94 mortgage at 4.0% over thirty years would be $1,165.02 per month.
The difference between the two payments is $445.44 per month. That is the cash flow savings. It is the result of a combination of a lower rate stretched out over another 30 years.
The real savings or the true delta is the difference of the interest cost on the existing balance at 5% and at the lower rate of 4%. There are two ways to calculate this. $244,026.94 at 5% simple interest is $1,016.78 per month (244,026.94 X .05 /12). That same balance at the lower interest rate of 4.0% is $813.42 per month. That’s only for the first month as the loan is amortizing. The difference is $203.36 per month. The quicker way is to realize the difference in interest rates is 1.0% and multiply that by the principal balance and divide by 12. You will get the same answer (244,026.94 X .01 /12 = 203.36)
The true savings for anyone contemplating this transaction is $203.36 per month. That’s far less than the cash flow savings of $445.44.
Do I Refinance My Mortgage?
If you were in this situation or something similar and the cash flow savings, a reduction in the minimum payment of more than $445 per month would allow you to better your life then perhaps you would. If cash flow is not an issue then one must look at the true savings as a function of cost.
Find a professional who will fully analyze all aspects of this transaction for you and answer any of your questions.