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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Should a retired couple refinance?
Dear Dr. Don,
We are a retired couple over 65 years old and have a mortgage
loan from an individual. The loan balance is about $42,000 at 10
percent interest, with 17 years remaining on the loan.
Having retired this year we only receive Social Security
and a small retirement check to live on. Should we refinance to
get a lower interest rate, with no cash out, to lower our monthly
payments? We filed for bankruptcy seven years ago, but our credit
has been excellent ever since.
Thanks,
Mary Mortgage
Dear Mary,
Start off by requesting a copy of your credit report and
your credit score. You'll have a better sense of where you stand
when applying for a new mortgage loan. You can order
your Equifax credit report and Beacon score on Bankrate's Shop
& Save channel or use one of the other consumer
reporting agencies.
As I write this, the national average for 15-year
fixed-rate mortgages is about 6.30 percent.
With your credit history you're unlikely to get this
low a rate, but even refinancing at 8 percent can result in substantial
savings as shown in the table below:
| |
Existing mortgage
|
Refinancing
|
Savings
|
|
Loan amount
|
$42,000
|
$42,000
|
|
|
Interest rate
|
10.0%
|
8.0%
|
|
|
Loan term (months)
|
204
|
180
|
|
|
Payment
|
$428.91
|
$401.37
|
$27.53
|
|
Total payments
|
$87,497
|
$72,247
|
|
|
Total interest
|
$45,497
|
$30,247
|
$15,250
|
|
(Estimates from information
provided.)
|
If your credit scores come in at a level where you
feel comfortable applying for a mortgage, then you can start shopping
lenders in your area using Bankrate's mortgage
search.
Before you fill out your first mortgage application,
take the time to read "Don't
get burned in the refi frenzy." Don't forget to review
your current loan document to make sure that there's not a prepayment
penalty.
Your current lender may be willing to lower your interest
rate rather than to lose the loan. This could be a lot less expensive
than closing on a refinancing with a new lender.
Before you start discussing this with your current
lender, it's worth the time and effort to get a loan approval and
terms from another lender so you've got some negotiating leverage
when you talk to your current lender.
Finally, use Bankrate's Refinancing
Calculator to determine how many months it will take to recover
your closing costs.
-- Posted: June 6, 2002
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