Everyone knows that you can save on interest by refinancing your home mortgage from a 30-year mortgage to a 15-year mortgage. But, guess what? You don’t have to refinance to get a “lower interest rate”.
Because there’s a ton of information on this topic, I’m going to break this blog up into two parts. On part one, we’re just going to focus on effective rate of interest. You have to start there if you’re going to understand how to effectively lower your interest rate (even without refinancing).
The Effective Rate of Interest is defined as the actual amount of interest paid (I), divided by the amount of principle (P), divided by the length of time of repayment (T). What the heck does that mean? Let’s break it down.
Let’s say you bought a house today for $100,000.00 on a 30-year mortgage with an interest rate of 5%. you would pay $193,256.52 of principle and interest if you maintain minimum payments for the entire 30 years.
Now, let’s say the day after you buy the house you win the lottery. The next day you are only going to write a check for $100,000.00, effectively pay zero interest. This direct relationship is constant, the less time you take to pay off the mortgage the lower the effective rate.
Don’t get me wrong there are plenty of times when it absolutely make sense to refinance the house from a 30 to a 15 year mortgage. But, make sure you know how to analyses and make the most sense out of your finances.
Over the next couple of weeks, we’re going to talk about when you should and shouldn’t refinance your home. We’re also going to give you secrets to help you discover how to pay less money by reducing your effective rate of interest. We think you’ll like the tricks we have up our sleeves. Stick around for part two.
– – – – – – to be continued – – – – – –