An interesting thing about lower interest rates is that not only is the payment lower, but the amount that goes to principal is larger and the amount that is paid as interest is lower. On a \$200,000 loan if you have an 8% interest rate the first payment is made up of \$134 of principal and \$1333 of interest, on a loan amortized over 30 years. If you have a 6% rate on the same loan, the first payment is \$199 of principal and \$1000 of interest. You obviously see how much the difference is in the total payment and how much more goes to paying down the mortgage. If you were to take the 6% rate and make the 8% payment you will end up with a much larger principal payment and actually pay off your mortgage in a bit over 19 years.

If you understand the relationship of interest to mortgage payments you have the ability to adjust your payments to work in the best possible way for you.

An example of the above statement comes from a question I received from a borrower.

He said he was in a 30 year fixed that he had been in for 10 years at 7.25% The payment is \$1381 per month, and has a current balance of \$175,000. The loan will be paid in full in 20 more years A 15 year loan for \$175,000 in the high 5% range is \$1464 which is a bit higher payment than the current mortgage. The comparison of principal and interest between the two loans shows the following: 30 year principal payment is \$274 and \$1106 will go to interest. The 15 year principal payment is \$608 and its interest payment is \$856.

The cost associated with going to the 15 year is \$83 a month or \$4980 over the life of the loan. The savings is 5 years of payments equaling \$82,860. .

The lesson is that the longer you pay at a higher interest rate, the easier it is to refinance to a shorter amortizing loan with a lower interest rate and save money over the life of the loan by shortening the number of years you need to payoff the loan. In many cases you can also save on a monthly basis as well.