The most simple and common way many people measure the value of a mortgage refinance is by the difference in payments you make each month after your refinance closes.

That perception can be wrong and very deceptive.

### Measuring the Value of a Mortgage Refinance

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. We may have a large tuition bill or a repair or maintenance issue that occurs unexpectedly. For instance I recently had a roof leak. 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 escrows such as 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, thirty year term mortgage loan. Your actual rate will depend on your credit score and loan-to-value among other factors. To keep it simple we will use the same balance from above example although that would require cash to close for normal closing costs. 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 and amortized over an additional 30 year term.

The real savings or true delta is the difference of the interest cost on the existing balance at 5% and at the new, 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 (244,026.94 X .04 / 12). The difference is $203.36 per month. That’s only for the first month as the loan is amortizing and the principal will be reduced. The quicker way is to realize the difference in interest rates is 1.0% (5.0 – 4.0) 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 your transaction for you and answer any of your questions.

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