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As anyone looking to finance a new home knows, interest rates have jumped in the last 2+ years as the Fed fights to lower inflation. Rates are currently between 6 and 7%, which can add thousands to what you’d owe over the life of a mortgage versus the lower rates of just a few years ago.
The good news is that the Fed has started to lower rates recently. Looking at previous business cycles these rates could be headed lower over the coming year or two. Hence, if you take on a higher-rate mortgage now, it might be worth re-financing later once rates go lower.
How Can FarPlanner Help?
FarPlanner lets you build up your financial plan, then simulate cash flows and account balances to estimate your long-term future finances. You can then make changes to see the impact on your overall net worth.
To demonstrate the impacts of refinancing per this article, we create a new project plan in FarPlanner, setting the ‘Ending Date’ to 20 years into the future. While a mortgage calculator such as the one here can be used to compare overall interest paid on specific loans, FarPlanner lets you view impacts of refinancing between loans, alongside your plan’s many other cash flow activities.
Add a New Home Tracker to the Plan
We add a new home asset ‘tracker’ estimator (named ‘Test Home’) to our test plan, following the red-circled highlights below:
We use the default values of $250,000 home purchase price, with a 0% down payment on a 15 year / 180 month mortgage, and 15-year interest rate (between 6% and 7% at the time of this article). Note that while this article just focuses on the loan interest payments, the home asset tracker also mimics the home’s asset value and typical household expenses into the future.
We then simulate all the future cash flows of our plan, including the new home asset and loan trackers. Clicking the ‘Test Home’ widget’s red-circled ‘visualize’ button examines it’s cash flows:
Following the red-circle path below reveals the impact of the ‘Test Home’ tracker:
The bottom circled amount is the total interest expense paid out for the life of the 15-year mortgage, almost $140,000! That’s about $90k more than when rates were below 3% a few years ago.
Adding a Future Planned Second Refinance Loan
Next, we add a 2nd loan to the ‘Test Home’ asset by clicking the add / ‘+’ button on the editor widget:
After selecting an ‘Additional loan’ type tracker with a name of ‘Refi Loan’ the following red-circled editor values are selected for the new refinancing loan:
Note this loan is set for 2 years into the future, with an assumption that interest rates will be lower at 2.5%. Note this lower rate is just a guestimate, and reality may be that interest rates stay higher for longer to combat persistent inflation.
Adding a Refinance Transaction Tracker
To refinance from the original ‘Test Home’ tracker’s loan to a new one, we add a refinance transaction tracker.
Once again clicking the add / ‘+’ button on the ‘Test Home’ editor widget, but with a ‘Refinance a loan’ type and name of ‘Refi’, we follow the red-circled path to set necessary properties:
Note we are refinancing from the original default mortgage loan of 6+% APR, into the new loan we created above at 2.5%.
Re-simulating the cash flows (which considers the original and refinanced loan impacts together) results in the following ‘visualize’-ed cash flow:
Note the ‘Refi’ transaction tracker is about 2 years into the future, with the 2nd ‘Refi Loan’ started at that time. The bottom-circled amount is the interest expense paid during the 2 year life of that initial loan.
Scrolling down, we see the ‘Refi Loan’s total interest expense paid:
Refinancing in the Future Could Save 10s of Thousands
Hence, the total interest expense paid out is $75,590, about $64k less than if we kept with the higher 6+ % rate! Not as good as the $50k or so in interest expense payments if the loan had been 2.5% the entire 15 years, but still much better than the highest interest rate loan of $140k.
Download FarPlanner for free today. Build your own private and discrete FarPlanner plan. Gain insights of what your financial tomorrow might look like, decades into the future.
