Q: My wife and I are thinking of refinancing. We have done so once before and have been in the house for ten years. The loan we currently have has a balance of $238,000 and we have almost $100,000 of equity in the house now.
We currently pay 5.5 percent interest and we are thinking of getting a new 30-year fixed-rate mortgage at 4.1 percent. I realize haggling with them for a ‘free’ refinance with the ammunition that we could take our business elsewhere is useless, but how do we know if it is the right time to refinance?
We do want to reduce our monthly payments and would see some monies down the road should we decide to pay off early. Can you offer any advice?
A: I think you should refinance – but only if you can cut the remaining term on your loan. You also need to compare loans on an apples to apples basis. In other words, you may want to trade in your 30 year fixed-rate mortgage at 5.5 percent for a 15-year at or below 4 percent. Your suggestion will have you paying an extra ten years of interest on your loan.
To compare your loan with the new loan and interest rate, you can ask your lender to run a comparison between the two loans and bump up your new loan payment to an amount that would be necessary to pay it off on the same date as your current loan.
If your current monthly payment is about $1,700, your new monthly payment for a new 30 year loan at four percent will be about $1,150. That’s a significant monthly savings. But over the long term, you’ll wind up paying a lot more money if you keep that loan an extra ten years.
However, if you pay it off in 20 years, your monthly payment would be about $1,450. In this example, you’re saving about $250 per month and will still pay off your loan at the same time as your existing loan.
You need to sit down with your lender and make these comparisons using the actual numbers that may affect you. The drop in interest on your loan from 5.5 percent to a rate below 4.5 percent is significant. Even if you pay closing costs, you should be able to recover those closing cost through the savings on your loan payments over six or so months.
You should talk to the credit union about helping you out. They won’t do a “free” refinance, but if you take a slightly higher interest rate, say 4 percent on a 15-year, they will probably cut most if not all of the costs. But if you go this route and actually stay in the property for five, ten or fifteen years, paying $1,000 or $2,000 of closing costs will outweigh the higher interest rate you might pay to get a loan without those costs.
Just make sure you understand those closing costs before signing on the dotted line with the lender.
You should also shop around with several other lenders so you have some real ammunition about costs when you approach them. Since you have equity and presumably a good credit score, you should be able to refinance with little problem.