Q: I have a 30-year mortgage at 7.5 percent with only 9 years left on my mortgage. There is a lot of equity in my home. Do you think I should refinance at a lower rate or stay with my current rate? My mortgage company would give me a 15 year loan. I have an FHA loan.
A: At this point in your loan, you’re paying mostly principal and you might not benefit from a lower interest rate. If you took a new loan now for 15 years, you would pay an extra six years of interest on that loan and have several thousand dollars of refinance costs up front. I’m not sure that will be worth it. In addition you might have significant closing costs in your refinancing.
But FHA may agree to do a streamline refinance for you. For a nominal sum, FHA simply adjust the interest rate on your mortgage. (This option is available for VA loans as well.) You may want to contact your mortgage servicer and see if this is available for your loan. In some cases the closing costs of refinancing in this option can be greatly reduced.
Another option is to see if you can get a home equity loan for the remaining amount of your mortgage. You may be able to get a home equity loan with a fixed 10-year payout at a lower interest rate that will be at a lower interest rate. You’ll have to see what the closing costs of the refinancing when you take out money from the home equity loan to pay off your existing loan and how how long it would take you to pay off those closing costs with your savings.
If it will take you more than a year to pay off the closing costs from the refinancing with the “savings” each month, you may want to take a pass and simply keep the loan you have.
When it comes to refinance your mortgage, you want to lower the interest rate, lower your monthly payment and cut the number of years you have remaining on the loan. If you can do that, the refinance is a no-brainer.
But your first stop should be your servicers to see if a streamline FHA refinance is available to you. You can also contact a HUD-certified housing counselor. Find one through HUD.gov.
Learn more about closing costs for each state