We developed this calculator over ten years ago in
response to some of our clients’ concerns about refinancing
for a lower rate, but having to start again with a new 30 year mortgage.
We enjoyed hearing our clients voice this concern because it indicated
to us that our clients were interested in making informed financial
decisions about their mortgage choice, rather than spontaneous decisions.
By now, you may know that one of the first discussions
we have with a borrower is whether or not we can improve on their
existing loan through a “no fee, no point loan” or what
we refer to as a “no cost loan”. (In essence,
this is where a borrower can refinance their existing loan, maintaining
the exact same loan balance and have Preferred Financial pay all
of the non-recurring closing costs. For a detailed explanation of
this concept, please see “Is
there a true no cost loan?” in our Frequently
Asked Questions section..)
The decision here is easy and involves two questions.
First, what is the borrower’s current interest rate?
And, second, What is the current rate for a “no cost loan"?
If the answer to the second question is a lower rate
than the first question, we have a “no brainer”. Intuitively,
we knew it was a “no brainer” but we had to develop
a way to illustrate this to our clients.
Here’s how we do it. Initially, let’s
assume that the current rate for a “no cost loan”
is 6.000% and you currently have a thirty-year, 6.500% fixed rate
mortgage that had an original loan balance of $300,000.
Let’s further assume that you have made
24 scheduled monthly payments of $1,896.20 (24 x $1,896.20 = $45,508.80)
which would have reduced the remaining loan balance to $293,069.20
($45,508.80 = interest of $38,578.00 and principal reduction of
$6,930.80).
"OUR NO BRAINER"
YOUR CURRENT LOAN:
Original Loan Amount
300,000.00
Interest Rate
6.500%
Monthly Payment
1,896.20
Original Term (months)
360
1st Payment Due Date
6/1/03
# of Payments Made (thru 5/1/05)
24
# of Payments remaining
336
Current Loan Balance
293,069.20
PROPOSED LOAN:
Loan Amount
293,069.20
Interest Rate
6.000%
Monthly Payment
1,757.10
Proposed Term (months)
360
At this point, you might make the following comment.
“Granted, my monthly payment would be lower but I would
lose the benefit of the 24 payments I’ve already made on
my current loan…..I will be starting over again with a new
30 year loan”. Here is our response in the form of two options:
OPTIONS:
If you opt for the proposed loan and continue
to make the same monthly payment you are currently making ,
i.e. $1,896.20, then your new loan will be paid in full after
298 months rather than the 336 months remaining on your current
loan. This would equal a savings of 38 months, or a total dollar
savings of $72,055.60 (38 x $1,896.20).
If you wish to pay off the proposed loan in exactly
the same number of months remaining on your current loan (336),
then you will have to make a monthly payment of $1,802.74. This
produces a better, more exact benefit of refinancing, since
with this option the remaining terms of both loans are the same
at 336 months.
Given Your Current Monthly Payment
$ 1,896.20
Minus The Payment Calculated Above
-1,802.74
Generates Your Actual Monthly Savings
$ 93.46
Total Savings (336 Months x $93.46)
$ 31,402.56
While either of these options is clearly beneficial,
Option #2 represents a better “apples-to-apples” comparison,
that is, both the current loan and the proposed loan share the
same loan balance of $293,069.20 and same remaining term of 336
months. The only difference is the interest rate, 6.500% versus
6.000% which creates the monthly payment savings of $93.46. This
monthly payment benefit is realized in the first month and continues
each month until the loan is paid in full.
Even though Option #2 is the better apples-to-apples
comparison, we would normally suggest that you opt for Option
#1, keeping in line with our typical conservative spin on things.
Our reasoning here is quite simple. If you’re comfortable
with your current loan payment, let us do this “no cost”
refinance for you. You just continue making the same monthly payment
that you have been making for the past twenty-four months.
To compare your current
situation, simply complete the shaded boxes below (Current
Interest Rate, Current Monthly Payment & Current Loan Balance).
Your # of Payments Remaining” will be calculated
automatically.
Next, select an interest rate of just .250%
lower than your current interest rate and enter it in the shaded
Proposed Interest Rate box below. That is, if you currently have
an interest rate of 6.250%, then enter 6.000% or lower as the
Proposed Interest Rate.
NOTE: Your proposed loan's term is less than your
current loan's remaining payments, so we'll do a straight cost
comparison over the life of the loan.
If you would like to see other types of comparisons, change
the proposed loan's term to be longer than your current loan's
remaining payments.
Given your current monthly payment::
xxx
Times the number of payments remaining:
yyy
Your total cost to pay off the current loan is:
Your proposed loan payment:
Times the number of payments on the proposed loan:
Your total cost to pay off the proposed loan is:
Total savings with the proposed loan::
If the results of these calculations appeal
to you, give us a call
for an update on the current “no cost” interest
rate. If the current rate is equal to or lower than the one
you used in your calculations above, it’s truly a “No
Brainer”.
NOTE: Your proposed loan's term is greater than
or equal to your current loan's remaining payments, so we'll
present a couple of alternatives:
If you opt for the proposed loan and continue
to make the same monthly payment you are currently making
($0.00) then your new
loan will be paid in full after 1
months rather than the 1
months remaining on your current loan. This would equal a
savings of 1
months, or a total dollar savings of $1
(1 x $1).
If you wish to pay off the proposed loan in
exactly the same number of months remaining on your current
loan (xxx), then
you will have to make a monthly payment of $yyyy.yy.
This produces a better, more exact benefit of refinancing,
since with this option the remaining terms of both loans are
the same at zzz
months.
Given your current monthly payment:
xxx
Minus the payment calculated above:
-
Generates your actual monthly savings:
Total savings over nnn
months:
If the results of these calculations appeal
to you, give us a call
for an update on the current “no cost” interest
rate. If the current rate is equal to or lower than the one
you used in your calculations above, it’s truly a “No
Brainer”.
Results will be displayed here once you have filled
in the form and click Calculate.
11 Crow Canyon Court,
Suite 100, San Ramon, CA 94583
(925)820-5557 ~ fax:(925)820-1141 contact@preferredfinancial.com
Broker ID# 00605612
11 Crow Canyon Court,
Suite 100, San Ramon, CA 94583
(925)820-5557 ~ fax:(925)820-1141 contact@preferredfinancial.com
Broker ID# 00605612
