Should I Refinance My Mortgage Even if It Only Saves Me $50/Month?

By Mark Fitzpatrick updated January 11, 2017

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Does it make sense to refinance your mortgage if you are only saving a small amount a month, like $50? The best way to answer this question is with an answer to another question.

Answer this question first: How long do you plan on keeping your property?

It’s best to try and answer this question because the answer will have everything to do with whether or not refinancing with a small monthly savings makes sense for you.

Many people refinance to lower their payment, which helps their overall monthly obligations. Others look to refinance in order to pay less interest over the life of the mortgage, since even a small reduction to the interest rate can mean savings tens of thousands over the long-term.

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Let’s Look at an Example

If you are in a position where you don’t need the monthly savings to help your monthly obligations, then you should apply that savings to your new mortgage. If you apply the monthly savings to your new mortgage principal balance, it has a tremendous benefit to your term.

Let’s use the example of a 30-year mortgage with a balance of $150,000 that was taken out about a year ago, at an interest rate of 4%. The new mortgage rate would go down to 3.5% and reduce the monthly payment $77.81.

Normally, a $77.81 monthly savings wouldn’t make sense to most people, but the trick is to apply that to your new payment. Doing this will reduce the term just over 5 years! Yes, that is like turning your mortgage into a 25-year term. Most people don’t realize that they should look at refinancing, even if the monthly savings is very small. Applying even the smallest amount to your mortgage will reduce the term and pay it off earlier.

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Conclusion

Does it make sense to refinance your mortgage, even if you are only lowering your payment a small amount? Absolutely! If you plan on keeping the property for a long time, just applying a small savings to the new mortgage payment will reduce the term, pay less interest, pay off the mortgage sooner, and build equity faster.

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