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Mortgages: When to refinance to a 15-year loan

Daniel Peart stands next to a

Daniel Peart stands next to a "for sale" sign in front of his home in Poway, Calif. Thursday, March 22, 2007. Divorce led Daniel Peart to refinance his home with a subprime loan. Like many borrowers with spotty credit, he agreed to a relatively high interest rate in exchange for two years of low fixed payments. In less than a year, however, the payments jumped beyond his budget and he had to put the house up for sale.

Q: I caught a portion of a response you made via on your radio show about comparing a 30-year loan to a 15-year loan. If I understood you correctly, the difference between these loans might be only $35 to $40 per month. Information I've gotten from other sources says it would be considerably more.

Am I correct in what I thought you said? Thanks.

A: You only caught a portion of the question. In that question, the caller had a 30-year loan and was refinancing from a much higher interest rate. If she refinanced from her existing 30-year loan at a high interest rate, she could get a new 15-year loan and pay about what she was paying before plus about $30 more per month.

When you compare a new 30-year loan against a new 15-year loan, the monthly payments on the 15-year loan will be significantly higher. For example, on a $100,000 loan, the monthly payment on a 30-year loan at 3.5 percent would be about $450; on a 15-year loan at 3 percent, the monthly payment would be about $690. (You get a little break because the interest rate on a shorter-term loan will be less than on a longer-term loan.)

As you can see, the monthly payment is significantly more on the 15-year loan. But if you have not refinanced in the last seven or so years and your interest rate on your original 30-year loan was 7 percent, your monthly payment would have been around $650. In this case, refinancing from a 30-year into a 15-year loan might make sense. Your payment would go up about $40 per month, but you'd end up paying off your loan in 15 years rather than 23 years (as on the original loan) or 30 years (if that was the term you chose for a new loan).

As some people approach retirement age, they might prefer to own their homes outright, without loans. For these people, today's low interest rates give them an opportunity to take advantage of 15-year mortgages and approach retirement debt free.

Which is always a good idea.

(Ilyce R. Glink is the author of many books on real estate. She also hosts the "Real Estate Minute," on her channel. Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call Ilyce's radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce and Sam through her website,

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