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Sunday, March 25, 2012
Refinancing may speed payoff time

By REGINA E. CORCORAN Special to The Citizen

Galloping turtles. That's the answer. The question is, what's faster than equity buildup from monthly mortgage payments?

Refinancing your mortgage is an excellent strategy under certain conditions, like a 2 percent reduction in the interest rate, for example. The result will be about a $500 per month reduction in the house payment for a $300,000 loan. Even on a smaller loan, like $100,000, the savings come to nearly $170 per month.

The payment reduction will cover closing costs in ideally one year and not more than two. For example, imagine the old loan balance was $294,000. The new mortgage is for $300,000 to cover the closing costs of around $6,000. It will take 12 months for the $500 per month savings to pay those closing costs. So, true savings will only begin in year two.

Each time you make a mortgage payment, they apply a little bit of the money to reduce the loan balance and the lion's share pays the interest you owe. It takes nearly 20 years of mortgage payments before the part applied to principal is greater than the part applied to interest.

If the borrowers took out our imaginary loan with a current balance of $294,000 eight years ago, with the most recent payment, they reduced their loan balance by $523.41. The payment before that, a whopping $520.75 was applied to principal.

This is what they call "amortization," from a French word meaning "to kill off." This is a very slow death.

When you refinance this loan with the new $300,000 one, the good news is $1,093.75 is the amount applied to interest. That is excellent compared to the $1,501.52 that you would pay in interest for the old loan on the next payment.

There is a little sad news, however. Since the amortization is starting all over, only $404.11 will be used to reduce the principal balance on your first payment.

With regular monthly payments, the next time they apply $523 to principal will be on the 72nd loan payment -- about as long as it takes a worm to cross all eight lanes of the turnpike.

Still, there is more good news. By the time that six years is up, you will have reduced the loan balance more than $33,000. It took you seven years to accomplish the same with the old mortgage, due to the higher interest rate.

And, of course, there's no sense in bemoaning the fact that you previously had an $18,000 per year tax deduction for interest and now it's only $13,000. On my planet, paying money for nothing is a bad way of obtaining a tax write-off. Try to find another deduction you like better. If you are self employed, it could be depreciation on a new or newer vehicle. Perhaps you can have another baby.

I'm not going to buy another horse. I'm not going to buy another horse. I'm not going to buy another horse. Maybe just a saddle or two?

What do you think?

Regina E. Corcoran, SRA, is a Florida real estate broker, state-certified residential appraiser and residential contractor. She is president of AmeriRealty Corp. and vice president of AmeriMortgage Corp. She can be reached at ReginaECorcoran@cs.com. Corcoran writes her column exclusively for The Citizen. It appears every other Sunday.

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