Q. I’d like your sage advice on whether you think I should consider refinancing.
My current loan balance is $250,000 with a fixed interest rate of 5.50 percent on a 20-year term. Our monthly principal-and-interest payment is $2,710. Our property is worth at least $600,000. I have been making an extra $200 payment monthly toward the principal. Our goal is to pay off the loan in less than 10 years.
I checked with my credit union, which offered us a 10-year fixed-rate loan, but the closing costs approached $7,000.
I think, because we will be paying this loan off early, a refinance may not make since. What would you do if you were me?
A. If it costs $7,000 to refinance, I would hesitate before I pulled the trigger. But luckily, my favorite mortgage program, the so-called “zero-cost refi” is widely available.
Looking at your situation broadly, I know immediately that refinancing makes sense because you can obtain a far lower rate on a 10-year fixed-rate program with no fees than 5.50 percent. In fact, I would quote 3.375 percent as of this writing.
A 2.125 percent drop in interest rate will do one of two things. It either will lower your monthly payment because your interest costs are lower, or it will take the interest savings and turn it in to principal curtailment if you choose to make the same monthly payments. Let’s illustrate.
You indicate you are making an extra $200 payment toward principal, making your monthly principal-and-interest (P&I) payment $2,910. With this payment, you would pay off your loan in 109 months, or about nine years. This certainly accomplishes your goal.
But if you refinance the $250,000 balance to a 3.375 percent 10-year fixed-rate loan, your P&I payment would drop to $2,457, a monthly savings of $453. This monthly savings totals $54,360 over a 10-year period.
The problem is you would have a mortgage for 10 years instead of nine. Let’s run some more numbers.
Since you would have 12 more months of a $2,457 payment, totaling $29,484, you need to subtract this from the payment savings of $54,360, giving you a net savings of $24,876. Even though your loan is stretched out an additional 12 months, refinancing makes sense.
Now let’s look at the refinance if you continue to make the same $2,910 monthly payment. Under this scenario, your loan would be paid off in about 98 months. This illustrates the benefit of a 2.125 percent drop in your borrowing costs. Refinancing to 3.375 percent with no fees doesn’t increase your balance. Making the same P&I payment that you’re currently making accelerates your payoff by 11 months, saving you $32,010.
Run to your nearest reliable and trustworthy mortgage originator and get it done. You’ll be glad you did.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.
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