Q: My wife and I refinanced our house in November and were able to go from a 30 year mortgage to a 20 year mortgage. Since we did that, we have made the decision that we will probably not be in the house longer than 10 years.
We checked with our mortgage company and were told we can do a streamline refinance for no cost and reduce the house payment $254 per month.
I think now that we are not planning to stay in the house, we should not keep the 20 year mortgage but refinance, reduce the payment and use the money saved in another savings vehicle. We currently have $135,000 equity in the home
A: You’re in a most fortunate position. If you can do a streamline refinance of your existing mortgage and immediately save more than $250 per month, you’re already in great shape.
What you should do is to take the extra monthly savings and pour it immediately back into prepaying your mortgage. That way, you will have just about paid off your mortgage in the ten years you hope to remain in your home.
These days, most investments are hardly worth investigating. Savings accounts are paying a little as .25 percent interest. Certificates of deposit (CDs), available at banks and other financial institutions, are paying a fraction of what they did several years ago.
On the other hand, every dollar you prepay on your mortgage effectively earns you the interest rate you carry on your home loan. For example, if your interest rate is 5 percent on your mortgage, every dollar you prepay earns you 5 percent.
One question to consider: Do you have adequate cash savings? If not, then skip prepaying your home loan while you salt away your monthly savings. Once you’ve built up adequate cash reserves, you can start prepaying your home loan again.
And a final thought: if you can save that much just by calling your lender, you might want to shop around a bit and see if you can save more by refinancing with someone else. If you can pay off any closing costs within 6 months and save more than $250 per month, it’s worth it.
Published: Feb 28, 2001