Dear Dr. Don,
I have a 30-year, fixed-rate term loan at 5.25 percent. I started making payments in January 2004 and am into the sixth year of the loan. The principal, interest, taxes and insurance, or PITI, payment is $1,756. We make an additional principal payment of $244 each month. My current balance is $213,000.
Should I refinance into a 15-year fixed-rate mortgage to shorten the loan term? Or should I start a biweekly program? Which is my best option?
-- Dario Decides
Since you didn't give me the original loan amount, I used your numbers to estimate an initial loan amount of $255,000. If you keep making the additional principal payments, your current loan will be paid off in June 2025, or after 21.5 years. Refinancing with a new 15-year loan has you paying off the new mortgage in the summer of 2024.
If you refinance your current loan into a 15-year loan at the Bankrate national average of 4.89 percent, you'll save about $14,000 (less any closing costs) versus staying in the current loan and making the additional principal payments. That's a pretax number. If you are able to use the mortgage interest deduction on your income taxes, the differential would be less by the amount the tax deduction reduces taxes paid.
You have a great rate on your existing mortgage, and you're aggressively paying down principal. You don't need a biweekly mortgage payment to improve on these results.
The decision to refinance into the 15-year mortgage should depend on how long you plan on being in the house and the interest rate you're offered on a 15-year mortgage. Bankrate's "Savings from refinancing" calculator will help you estimate the savings given the particulars of your existing loan and the refinancing.
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