Tax deductions may make refi no sense

What brokers and loan originators may not tell you

Let’s take a simple study example. Assume the original loan and refi with the following parameters:

• the original loan: $100K for 30 years @ 4%.
• the refi loan: $100K for 30 years @ 3%, closing cost: $13,237.83.

Yep, I know, it’s a magic number and closing cost: 13% is too high, but please, follow me.

Is it worth to refi?

First, let’s assume that we add the closing cost into the loan. Basically, we are going to compare two 30 years loans:

• the original loan is $100K @ 4% versus…
• the refi: $113,237.83 @ 3%.

Actually, in both cases, monthly and annual payments will be exactly the same. This is because of the magic number!

• the annual payment: $5,728.98,
• the monthly payment: $477.42 ( = $5,728.98 / 12).

Each monthly/annual payment consists of two parts: principal and interest.

At the beginning, the interest is usually bigger than the principle, but towards the end of the loan, the principal increases, while interest goes towards $0.