My husband and I owe $28,500 on our home. We pay $577 per month at 4.5 percent interest and have six years remaining with a 15-year loan. We will both be retiring in five or six years and would like to take advantage of the current low rates to cut our monthly payment. A loan officer with the lender who holds our mortgage said our new monthly payment would be $300-something at their current rate of 3.25 percent, but she also said lowering our monthly payment was not a good reason for refinancing. It is to me! What say you?
According to the Mortgage Bankers Association, in the second quarter, it cost lenders about $3,200 to originate a loan. Since most mortgages are far larger than the balance you now owe, the proportionate cost to refinance your loan could be steep.
The money you invest in refinancing costs might do more good as a loan prepayment, because you only have six years remaining on the debt. Make sure you have the right to prepay, in whole or in part, without penalty and at anytime.
Imagine that you did refinance and got a 15-year or 30-year loan. Yes, your monthly payment would fall, but the loan term would be longer. A longer mortgage term would produce a higher overall interest cost than the expense of your current mortgage – unless you prepaid the replacement loan.
Some suggestions: First, speak with several lenders and get specific loan terms in writing – rates, years, fees, points, closing costs, etc.
Second, look into a home equity line of credit instead of long-term mortgage. Use the money you receive to pay off your current mortgage – then pay down the line of credit as quickly as possible.
Third, get independent advice. Speak with a fee-only financial planner and review the cost of your loan, the expense to refinance and the benefit of a replacement loan. See if it makes sense to refinance.