Refinance of the loan
In my practice as a mortgage specialist, I often encounter the myth that the refinancing of the loan does not pay off, because in the first years you pay a lot of interest and the refinance of the loan means repayment from the beginning and the subsequent overpayment of the loan.
Looking at the repayment schedule containing the loan balance and interest payments, it is easy to believe that myth – in the first years of the loan repayment, the interest represents a substantial portion of the repayment, and the ratio is reversed towards the end of the loan relationship.
Refinance of the loan in figures
We can be without presumptions and speculations only when simple mathematics reveals the truth. I do not want to work with bare figures, so I will use the stories of fictitious clients who have decided to refinance their loan. The parameters of all clients are identical and at the same time they have been granted a 30-year loan with an interest rate of 5.5%, an interest rate fixation of 5 years and a monthly instalment of € 568 per month. On the anniversary of the fixation, everyone has the opportunity to refinance the loan.
Refinance of the loan for the “Unbelieving” Family
The “Unbelieving” Family fundamentally refuses to refinance the loan with the belief that they have already paid the interest for the most part and do not want to start again. The stories of other families with the same loan story are dedicated to the “Unbelieving” Family – until now.
Refinance of the loan for the “Hardworking” Family
The “Hardworking” Family likes to try new things. This family with three children, a wife on maternity leave and the stability of an entrepreneur’s income, has set as its highest priority as minimizing monthly payments. They can achieve their goal by refinancing the loan with an interest rate lower by 1% and extending the maturity period again to 30 years. The new monthly installment of the loan for the next 5 years will burden the family budget by € 99 less.
This change for the “Hardworking” Family means paying less in the amount of € 4,220 over the next 5 years than the “Unbelieving” Family. Although they repay the loan later, reducing the installment allows them to bridge the period with just one household income.
Refinance of the loan for the “Prudent” Family
The third family has also decided to refinance their loan. The “Prudent” Family holds the view – why pay more if you can have the same for less. With an interest rate of 4.5% and the same 25-year maturity period of the loan, they can see in the repayment schedule that the principal is not paid less in the following years than at the higher interest rate.
This knowledge was very valuable to the “Prudent” Family because, due to the strong myth of infinite overpaying, they were very hesitant about the refinancing of the loan. Each month they now enjoy a savings of € 53, and in the next 5 years they will pay less by an amazing € 4,546 and the loan balance will be lower by € 1,289 compared to the loan balance of the “Unbelieving” Family. After counting the sum saved during the next 5 years on lower installments and the sum saved on interest, refinancing the loan represents a total savings of € 9,015!
Refinance of the loan for the “Capable” Family
The “Capable” Family has been doing well in recent years, so they have decided to get rid of their loan as soon as possible. They have decided to refinance the loan and shorten the maturity period while paying the same monthly instalments. The maturity of the loan was reduced by 4 years thanks to the interest rate.
Although their monthly installment is the same as that of the “Unbelieving” Family, the loan is repaid 4 years earlier, and over the next 5 years their loan balance is lower by € 9,770!
Refinance of the loan – conclusion
Although these stories are fictional, the figures in them are true and they are based on the calculation of mortgage calculators. The myth will be a myth until there is a group of unfaithful not willing to admit information and facts.
Everything else is about priorities. Is the goal to reduce the monthly payments as much as possible? Is the goal to pay less, but not to overpay? Is the goal to overpay the loan as little as possible and to reduce the maturity period?
You will decide your goal and we will help you to fulfill it.
Martin Barus, 03.10.2011
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