Refinancing: 15 or 30 Year Loans?

Q: We are one of the few who can but have not yet refinanced and are looking at refinancing this week.

We have about $250,000 equity in our home on a 30-year mortgage 6.2 percent. We are 3 years into the mortgage. We are in our mid 50s. We know we will stay in this home for at least 7 more years.

We have just come into a very nice inheritance. Should we go for a 15-year fixed-rate mortgage and put cash in to lower our payments or should we just refinance with a new 30 year loan at 4.6 percent and invest the inheritance elsewhere.

A: Go for the 15-year refinance, but don’t put any cash in. Leave a little of the inheritance on the side so you have plenty of emergency cash, and invest the rest. The idea is that the payments might be higher, but the interest you’ll get (around 4 to 4.25 percent) will help tremendously, so the differential won’t be that much, if any.

For example, let’s say you took out a $250,000 loan for 30 years at 6.2 percent. Your monthly payment is about $1,531. On a 15-year loan at 4.25 percent, your monthly payment will be $1,874. That’s about $350 per month extra, or $4,200 more per year. If that would be a stretch for you, you can just shell out $350 per month from your inheritance cash to make up the difference.

If you are going to stay in the property for 7 more years, you’ll wind up spending just shy of $30,000 on the principal payments. But in 7 years, your mortgage balance will have fallen to about $152,000. In other words, you’ll spend $30,000 but you’ll cut your loan by $100,000.

I think that’s a worthwhile investment.

And, you can invest the rest in longer-term investments, like a well-rounded portfolio including some mutual funds, bond funds and cash.


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