Is it time to refinance a mortgage?
I have a $390,000 mortgage at a 5½ percent fixed interest rate for 30 years. I have 27 years left in the current term. Is it a good idea to refinance the loan for 30 years fixed at a 4.375 percent interest rate? Closing costs will be $1,800.
– Valentina Vacillates
If you plan to stay in the house for a more than a year, and you qualify to refinance, this is an opportune time to bring down your mortgage interest rate with relatively inexpensive closing costs.
With the Fed’s decision to start a second round of quantitative easing, homeowners should continue to see downward pressure on mortgage interest rates. That said, you shouldn’t try to wring the last 0.01 percent out of your refinance rate.
Using your numbers, assuming that the $390,000 was the initial mortgage balance. Three years into the mortgage, the loan balance should be about $373,333. From there, you can look at some refinancing options arrived at the table presented below:
| Existing mortgage | Refinance 30-year fixed | Refinance 30-year fixed with additional principal payments |
Refinance 20-year fixed | |
| Loan balance: | $373,333.00 | $373,333.00 | $373,333.00 | $373,333.00 |
| Interest rate: | 5.5% | 4.375% | 4.375% | 4.15% |
| Loan term (months): | 324 | 324 | 262 | 240 |
| Monthly payment: | $2,214.38 | $1,965.66 | $2,214.38 | $2,291.94 |
| Total interest expense (pretax): | $344,124.89 | $263,539.96 | $206,945.05 | $176,733.10 |
| Estimated after-tax expense (25%): | $258,093.67 | $197,654.97 | $155,208.79 | $132,549.82 |
| Difference after-tax from existing mortgage: | - | $60,438.70 | $102,884.88 | $125,543.85 |
The after-tax numbers assume a 25 percent marginal federal income tax bracket, and that you can fully utilize the mortgage interest deduction on your taxes. Simply put, that means that the mortgage interest deduction isn’t just replacing the standard deduction on your taxes.
In the second column you will see the loan term set at 27 years. This allows you to compare apples to apples. The refinance will save you over $200 per month and take less than 1 year to recoup the cost of the refinance. While Lenders won’t offer you a 27 year loan, you simply just make the extra payment each month as also shown in the 3rd column.
The third column shows the benefit of paying the current amount that you are used to paying right now. This will accelerate your mortgage and pay if off in just under 22 years and save you a ton in interest expense.
So does it make sense, yes, provided that your cost are correct and you stay in the home for a few years.
