Mortgage refinance not always worth hassle

Don TaylorQuestionDear Dr. Don,
We currently owe $67,000 on a 30-year fixed-rate mortgage for $132,000. We're seven years into the loan. We put an extra $1,000 on the principal each month. If I refinanced at 4.18 percent for a shorter loan period (10 or 15 years) would it save me money? Would it be paid off sooner with the same extra $1,000?
-- Richard Refi

AnswerDear Richard,
You can use Bankrate's mortgage calculator to figure out when the existing home loan would be repaid and your total interest cost with your current approach to paying down the mortgage.

If you had made additional principal payments of $1,000 each month since the inception of the loan, you'd be further along than the $67,000 current loan balance.

As a quick measure, paying $12,000 a year in additional principal payments on the current loan will have you paying off the loan in the next four to five years. If you reduce the interest rate and shorten the loan term by refinancing, you can reduce the total interest expense if you continue to make additional principal payments to the same combined monthly payment you're paying now. However, you would add the closing costs associated with the new loan.

You didn't state the interest rate on your current home loan. However, you're paying the loan down so aggressively that the total interest expense with the existing loan is going to be pretty close to the total interest expense on a new 15-year refinancing with additional principal payments -- after adding in the closing costs of the new loan. Run the two scenarios through the mortgage payment calculator and see what works best for you.

With my guesstimates on your existing mortgage, the two were so close that it wouldn't be worth the hassle of refinancing.

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