Q: My house was built in 2004 and I just refinanced six months ago. My new loan is a 15-year loan at 4.5 percent. The balance when I got the loan was $344,000. I just got an interest rate notification from my credit union that the current interest rate is 3.875 percent for a 15-year loan, and I'm kicking myself in the tail for not having waited. My closing costs to refinance would be $2,150. Should I do another refinance at this time with my existing balance of $335,874?
A: Remember, the cost to refinance is not just the $2,150. You also have to add whatever you spent to refinance in March. Also, you have paid down six months' worth of your loan, so by the time you close, you will have paid nine months' worth of interest.
Since your existing balance is $335,874, it might pay to refinance over the long run -- or not. You have to do the math.
Your current payment is about $2,631 per month. On a new 15-year loan, you'd pay $2,463, a savings of about $169 per month. Assuming your closing costs are $2,150, it will take you almost 13 months to save enough on your loan to make the refinance costs worthwhile. But you'll lose the six months' worth of interest that you have already paid -- or, to say it differently, you'll have to pay an additional six months' worth of interest at the end of your loan.
If you calculate your loan on a 14-year term rather than 15 years, your monthly payments will be $2,593, or a savings of $38 per month. You can see that it would take a lot longer to pay off the costs of your refinance (almost 58 months, or more than four years). On the other hand, you're saving an additional six months of interest.
The interest savings is substantial. If you keep your original 4.5 percent 15-year loan, you'll pay a total of $129,683 in interest. If you refinance to a new 15-year loan, you'll pay $107,544 in interest, a savings of about $22,000, which more than covers the six months of interest you've already paid.
But if you refinance and pay off the loan on a 14-year term by paying slightly more each month to meet the 14-year deadline, you'll only pay $99,832 in interest over the life of the loan, about $30,000 less than the original 15-year mortgage.
It seems that there is a significant amount of cash you will save if you refinance, even if it takes you four or five years to "pay off" the costs of the refinance with your monthly savings.
While your current 4.5 percent rate is still a great rate, I think a 3.875 percent rate might be a little better, especially if you plan to stay in the house until the loan is paid off. You have to remember that if you end up moving in a couple of years, you may not get the benefit of the lower interest rate on the refinancing.
When it comes to refinancing, you have to consider the length of time you plan to stay in the home, the interest rate and the costs involved in refinancing, and whether you can pay off the loan on the same schedule as your current loan.
Ilyce Glink's latest book is "Buy, Close, Move In!" Distributed by Tribune Media Services, Inc.
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