A mortgage refinance can lead to significant savings. Since a mortgage typically involves such a large balance, refinancing could mean saving thousands or even hundreds of thousands of dollars in interest over the life of the loan.
Let’s walk through the math of how much you would have saved if you refinanced your mortgage in 2016.
The Situation
Back in 2009, Sally and Harry were lucky enough to keep their jobs during the Great Recession. After saving up a down payment of $20,000, they bought a home with a purchase price of $400,000. At the time, interest rates were moderately high, which means they locked in a mortgage interest rate of 5.50%.
After their 5% down payment of $20,000, their monthly mortgage payment was $2,157.60, according to this calculator.
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Time for a Refinance
After several years had passed, Sally and Harry saw that interest rates had dropped. They decided to refinance their mortgage. In 2016, mortgage interest rates averaged 3.65%, according to the Freddie Mac Primary Mortgage Market Survey.
In the eight years between their first closing and their refinance, the couple’s monthly payments had pushed the mortgage balance down from $380,000 to around $329,000. When they refinanced, they opted for another 30-year loan term with an interest rate of 3.65%. That led to a monthly payment of $1,505.04, according to this calculator.
How Much They Saved
Refinancing their mortgage significantly changed the couple’s financial picture. With their new mortgage payment, they were saving over $650 per month on their housing costs.
The monthly savings add up quickly. For their new mortgage, the couple will pay $212,815.10 in interest over the loan term. That’s significantly less than the total interest they’d pay with their old mortgage, of $396,735.35. In total, they saved over $165,000 in interest by opting to refinance, after factoring in the interest they’d already paid toward their old loan of around $7,516.
How To Save Interest on Your Mortgage
If you have a mortgage, it’s easy to pay hundreds of thousands of dollars over the course of the loan in interest payments. That’s money that goes straight to the lender, not your home equity. With so much money on the table, it’s always a good idea for homeowners to assess their options for potential savings on their interest payments.
One option is to refinance. If you can lock in a lower rate, it’s possible to tap into significant interest savings. When refinancing, make sure to shop around to find the best interest rate to maximize your savings. But keep in mind that refinancing isn’t always worth it, run the numbers before committing to make sure the move makes sense for your situation.
If you refinance, consider choosing a shorter loan term to stretch your savings even further. Although your monthly payment might grow, a shorter term can help you avoid paying more interest.
Another possibility is to make extra payments toward your mortgage principal. As you pay down the principal, interest will accumulate more slowly, which can help you tap into potentially significant savings over the loan term.
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This article originally appeared on GOBankingRates.com: If You Had Refinanced Your Mortgage in 2016, You’d Be Saving $165K or More in Interest
