refinance

Choosing whether to do a 15-year refinance

Don TaylorDear Dr. Don,
About two years ago, I refinanced my home and the interest rate went from 6 percent on a $310,000 loan to 4.5 percent on a new $300,000 loan. I currently owe $285,000 on the new loan and I am thinking of refinancing again. The current rate I am being offered is 2.875 percent with no points and a fee of $250. I know I will be increasing my monthly payments by about $450, but if I can afford to do that, will it make sense to refinance? Thanks.
-- Angel Amortization

Dear Angel,
From the rates you provided and the change in the size of the monthly payment, it looks like you're considering refinancing into a 15-year mortgage from a 30-year fixed-rate mortgage. The 2.875 percent rate you quoted is well below the Bankrate national average of 3.16 percent for a 15-year fixed-rate mortgage, at the time of writing.

Refinancing into another 30-year fixed-rate mortgage would still reduce your interest rate, but extending back out to 30 years could actually increase your total interest expense.

With the refinance you're describing, you'll capture a great mortgage interest rate and save thousands in interest expense. Odds are this will be your last refinancing of this home. Should you go for the 15-year mortgage? You say you can afford the additional $450 per month in payments. My question is in whether you are shortchanging other life goals in allocating that money to mortgage payments. Those goals could include saving for children's college or investing for your retirement.

If the higher mortgage payment makes it so you can't afford to contribute to a 401(k) retirement plan at work, and your employer offers a matching contribution, then you should consider that investment alternative and not shorten up the mortgage to 15 years. In most cases you make 50 percent on your money by taking advantage of a company match. Go a little bit longer in the mortgage term -- let's say to 20 years -- so you can afford to contribute to your 401(k) up to the limit of your employer's matching contribution.

But if you can truly afford the increase in payments with the 15-year mortgage, and the closing costs are as low as the $250 fee, there's not much risk in going through with the refinance.

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