Is a lower rate always a good reason to refinance?

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So the short answer is no, not always. Why not? Mortgages are amortized, which means that the payments are spread out over the length of the loan in equal amounts. Each month, even though the total payment is the same, the amounts towards interest and principal change with each payment. At the beginning of the loan, the interest portion of the payment is at its highest and the remainder of the payment is applied to the principal. Since most of the interest of the loan is paid in the early years of the loan, it’s important to look at how much interest expenses are left on your current loan and compare that with the total cost of interest with a new loan at a different rate.

With an amortized loan, calculating the payment is just math. The payment is based on the loan amount, interest rate and term (duration) of the loan. Comparing two loans with the same interest rate will show that the loan with the lowest payment will also have a longer duration. In this case, the loan with the lowest payment is also the most expensive loan, in the long run, costing more money in interest over the duration of the loan. Finding a comfortable payment with a great rate and term is the balancing act that needs to happen to make sure you are happy with the loan that you finally get while saving as much money as possible.

It may seem complicated, but we are happy to assist you in these calculations and provide possible options.