mortgage

How to use $117K to reduce mortgage

Don TaylorDear Dr. Don,
This is a question about homeownership and how my wife and I see things differently.

Our home is valued at about $232,000. The remaining balance on our 30-year mortgage is $157,000. We're about two years into the loan, which was financed at 4.375 percent.

We now have $117,000 in cash available to pay down the loan.

So, here's the question: Would it be better to refinance a minimum of $50,000 on a 10-year loan at 3.589 percent? Estimated closing costs are $1,250. I want to move ahead. My wife doesn't think so. She wants to pay down the loan.

Refinancing would leave us with $10,000 in cash. I think our main goal is to own our home with no mortgage payments more quickly.

Thanks in advance,
-- Greg Groundbreaking

Dear Greg,
Leaving aside the question of keeping your marriage intact, I am not a fan of your wife's lump-sum payment approach. Unless you persuade the lender to recast the mortgage, you won't reduce monthly payment on the existing loan. You'll still be left with a 30-year mortgage. That won't get you any closer to paying the loan off earlier.

I prefer your approach going for a shorter-term mortgage, capturing a lower interest rate. It will take a few years to recoup closing costs because you're only refinancing a fraction of your current mortgage. That's fine as long as you plan to stay in the house.

I'm a little curious how the cash became available two years after you closed on the current mortgage. If the money had been available earlier, you might have gotten a 15-year mortgage and saved even more money in interest expense as well as avoided another round of closing costs.

Still, by refinancing you'd save over 0.75 percent on the mortgage rate, or almost $400 in interest the first year.

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