The Most Frequently asked mortgage question -

My rate is 7% and I am 12 years into a 30 year fixed, should I refinance?

Two important questions to ask the borrower

1. Do you want to pay off the loan in 18 years or less?

2. Do you want better cash flow?

Assume current 200,000 mortgage @ 7% = 1,500 monthly payment

Example of Three solutions that answer both objectives -

1. New 30 year fixed -
Keep current loan = 324,000 to pay off loan in 18 years
Refinance into a new 30 year fixed rate @ 5% = 1,074 monthly payments = 386,512 to pay off loan in 30 years

The borrower will pay out more to refinance, about 57,000 - however their monthly cash flow will increase by about 450.00 per month or 162,000 over the life of the loan, however subtract the 12 years for the longer pay out = 97,200 is the real cash savings

2. New 20 year fixed -
Keep current loan = 324,000 to pay off loan in 18 years
Refinance into a new 20 year fixed rate @ 5% = 1320 monthly payment = 316,800 to pay off loan in 20 years

The borrower has better cash flow and after paying the refinance charges - the pay off is about the same amount - but adds 2 years to the loan pay off. The 18 year monthly savings for this refinance is 38,880 and the extra 2 years payments = 31,680 = 7,500 is the real cash savings

3. New 15 year fixed rate
Keep current loan = 324,000 to pay off loan in 18 years
Refinance loan new 15 year fixed @ 4.375 = 273,104 to pay off loan in 15 years

By keeping the monthly payments near to current payment, borrower will save about 45,000 in interest over the next 15 years, and 54,000 saved in 3 years of fewer loan payments with the refinance = 99,000 is the real cash savings.