CNC Mortgage Blog

By Carlos Gutiérrez

Reducing debt on a mortgage is a very safe investment. On a $200,000 mortgage refinance a borrower can expect a return on investment of 12.9% just by dropping the rate less than 0.5%. A drop of 0.86% will give you a 25% return on investment. Depending on the returns your other investments are getting in the market, this is one to consider. On a $300,000 mortgage the interest rate differential is even smaller.

The risks that you incur when you decide to invest in refinancing a property are:

1) The cost of the appraisal if the property is worth less than your estimate (between $405 for a single family residence to $625 for a rental property.)

2) The closing costs if you sell or refinance the property before you have recovered your money.

Aside from those uncertainties, you can easily determine how profitable refinancing will be.

I will present two scenarios each with two different returns on investment.

SCENARIO # 1

Current debt on your home $291,000

Estimated new debt rolling in the closing costs $300,000

Estimated value of your property $375,000 (80% loan to value)

Closing costs $6,602.95

At a rate of 4.75% (APR 4.895%) on a new 30 year fixed mortgage your new payment will be $1,564.94 for principle and interest. If your present loan has a payment of $1,635 per month you will be saving $70 per month, $840 per year. $840 per year divided by closing costs of $6,602.95 gives you a 12.7% return on your investment. You will recover your investment in 7.86 years. A $300,000 30 year loan with a payment of $1,635 per month is obtained with an interest rate of 5.13%.

If your payment is now $1,703 per month for principle and interest on the same $300,000 at a rate of 5.5% you will be saving $138 per month, $1,656 per year, a 25% return on investment, an investment that will be recovered in four years.

SCENARIO # 2

Current debt on your home $193,000

Estimated new debt rolling in the closing costs $200,000

Estimated value of your property $250,000 (80% loan to value)

Closing costs $5,113.95

At a rate of 4.75% (APR 5.027%) on a new 30 year fixed mortgage your new payment will be $1,043.29 for principle and interest. If your present loan has a payment of $1,099 per month you will be saving $55 per month, $660 per year. $660 per year divided by closing costs of $5,113.95 gives you a 12.9% return on your investment. You will recover your investment in 7.75 years. A $200,000 30 year loan with a payment of $1,099 per month is obtained with an interest rate of 5.21%.

If your payment is now $1,150 per month for principle and interest on the same $200,000 at a rate of 5.6% you will be saving $107 per month, $1,284 per year, a 25% return on investment, an investment that will be recovered in four years.