Q: We presently have a 20-year 5.5 percent fixed rate mortgage with about 14 years left to go. We owe approximately $163,000. Our home appraised for $200,000.
We would like to refinance to a 10-year fixed rate loan at a better rate. Can you please recommend some loan companies that will provide us with quotes on a 10-year fixed rate mortgage? We would like to have our home paid off by the time we retire.
A: Unfortunately, we can’t provide recommendations for lenders, real estate agents or brokers, or any of the other real estate industry professionals. But here’s what we can suggest: You should talk to several different types of lenders, including one of the big national lenders, a regional bank, a local mortgage broker, an online lender, and a credit union, if you belong to one or can join one.
Only by doing the work to speak with different types of lenders will you begin to understand how their loan products, costs and fees compare and understand where you will find your best deal.
We’re glad that you’ve decided to pay down your mortgage debts and enter your retirement without a loan on your home. However, before you decide to do that, you should consider a couple of items. First, you’ve had your current loan for about six years and have already paid down quite a bit of your debt. If you refinance now, you might be able to reduce your interest rate from around 5.5 percent to around 3 percent or less on a 10-year fixed rate mortgage.
With that change in your interest rate, the amount you’ll pay in interest on a monthly basis should go down by about $300. That’s a nice amount of savings even though your monthly mortgage payment would go up by about $200. (Your payment will go up as you will have to increase your monthly payments on your loan to achieve a payoff date in 10 years rather than 16 years.)
As you embark on this journey, you should make sure that the increase in your monthly payments won’t cause you any undue stress along the way. If it will or might, you could consider a 15-year fixed-rate loan or another 20-year mortgage with a slightly higher interest rate.
Your monthly interest savings will be slightly less. You’ll have a lower monthly payment but can pay the same amount you would have paid on a 10-year loan. If times are good, you make the higher payments and your financial pocket is tight, you can pay the amount set for your loan.
You can still achieve the goal of paying off your loan in 10 years or so – it may take you a year longer, but you’ll have some financial flexibility, which is crucial as you near retirement.
Don’t forget about the cost to refinance. In some parts of the country, refinancing is not that expensive, but in other parts, it can be much more expensive endeavor. If your costs to refinance are about $1,500 and you’re saving about $300 per month, you’ll recover your costs in about five months.
That recovery time is great. In fact, if you can “earn” back the cost of the refinance within a year, it’s a home run. But if you have to pay certain taxes to refinance and it boosts your overall refinance costs to $4,000, you have to weigh those costs against the benefits you’ll get on the loan.
What happens if you move in the next couple of years? Frequently, homeowners refinance their loans, pay the fees and forget to think about the possibility that they might move and sell the home or refinance the home.
Lastly, with interest rates as low as they are now, you might want to talk to a retirement specialist to make sure you are directing your current cash in the right direction. If you’re using money that you might otherwise put into your retirement account to pay down your mortgage debt, the smarter move might be to fund your retirement accounts rather than pay down your mortgage debt. Adding another $10,000 to your Roth IRA accounts each year might be a strategic long-term move.
While that may be a personal decision you’ll have to make, you should talk to a retirement specialist of financial advisor to walk you through the numbers.