Refinance Depends On More Than Interest Rate

Added January 19, 2009 by Ilyce R. Glink and Samuel J. Tamkin

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Summary: Is it better to refinance to a lower interest rate or continue with an existing mortgage? What factors should you consider when refinancing a mortgage loan? Determining whether it's a good idea to refinance depends not only on the interest rate but also on how long you plan to stay in the home.

Q: I have a $77,000 mortgage at 6.125 percent. I originally had a 30-year fixed rate mortgage and am now considering refinancing at 5 percent for 20 years. I have 10 years to go until retirement, and will probably consider selling and moving at that time. With that said would refinance be a smart move or should I just ride out this loan for 10 more years?

A: One key element that's missing in your question is how long you have had your current loan. If you have had the loan for a while and have paid down a sizable chunk of the original balance, you may find that refinancing now even at 5 percent for 20 years will be a lower monthly payment than your original loan.

You'll save about $1,000 per year on the difference between your current interest rate and the new interest rate on a loan balance of $77,000. That would mean a savings of about $10,000 over the next 10 years. If you can minimize your upfront costs, refinancing would seem to make a lot of sense.

While your monthly payment on either loan may be about the same, you'll pay down the loan balance on the new 20-year loan much faster than your old 30-year loan. If you're working with a mortgage lender or broker, have him or her walk you through the numbers. Compare the principal and interest on your current loan with the new loan.

When you go over the numbers, if they print out an amortization schedule, see where you will be on either loan in 10 years' time. At that point you'll be able to tell whether you'll be better off with your new loan and how much you'll save.

Jan. 19. 2009.

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