Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Refinancing halfway through a mortgage?

Dear Dr. Don,
I have a first mortgage at 9.75 percent for a condo townhouse. I have a 30-year mortgage, and have paid off 14 years. Does it pay to refinance with a 15-year fixed rate for 6 percent and repay more interest, since I am almost paying principal now?
Phyllis Payoff

Dear Phyllis,
You're right in stating that as you pay down your original loan, more of your monthly payment goes toward the repayment of principal vs. paying interest expense. But with 16 years remaining on the mortgage, that's not a reason to rule out refinancing at an interest rate much lower than your current loan.

Whether you take out a new loan, or continue making payments on the old loan, the outstanding loan balance is the same. Let's say that the loan balance on your current loan is $50,000. The interest component of your mortgage payment is based on the monthly interest rate times the outstanding loan balance.

With your existing mortgage, that rate is 9.75 percent. If you refinance, you are financing the outstanding loan balance at a 6-percent interest rate. The interest component of the new mortgage payment will be less than the interest component on the existing mortgage payment. The table below illustrates this example.

You can use Bankrate's mortgage calculator to put together a table using the particulars of your situation. Or just skip that step and go right to the refinancing calculator to determine how long it will take for you to recoup your closing costs on the new mortgage.

-- Posted: Dec. 12, 2001