December 13th, 2010 4:17 PM by Wendy Thomas
Trying to pay off your mortgage early? Is it more beneficial for you to refinance at a lower rate for a shorter time period, or to pay more each month towards your current mortgage? Several factors come into play...
First, reducing your mortgage from a 30 year to a 15 or 20 year mortgage will most likely increase your mortgage payment several hundred dollars. For example, if you have a $200,000 loan amount, 30 year fixed rate at 7% interest, your monthly payment would be $1330. To refinance to a 15 year mortgage at a 6% fixed rate, the minimum payment would be $1620. Can you afford the additional required payment of $290?
If you don't refinance and you pay the $290 difference monthly with your 30 year current mortgage, at the end of the 15 years, when the 15 year mortgage would be paid off, you would still owe over $22,000 on the 30 year mortgage. Therefore, if you plan to be in your house for 15 years or more, it's better to refinance at a lower rate. General rule of thumb seems to be that refinancing is worth it if the interest rate is at least 1% less than your current rate-- if you're paying 7% now, usually not worth refinancing unless the new mortgage will be 6% or less.
If you plan to stay in your house for a shorter time period, it's probably just as beneficial to make the extra payments. If you include the closing costs that would be included in financing the new mortgage, it would take approximately 2 years and 3 months for the mortgage balance to be equal... In other words, after 2 years and 3 months, paying $290 extra on your current mortgage (in the above situation) and refinancing will have close to the same payoff at that time.
Every home is different; every loan is different. If you have any questions, I can refer you to an excellent loan officer! Just give me a call or email!