Dear Dr. Don,
My husband and I are refinancing our home. We can’t decide between a 10-year or 15-year mortgage. We can afford either loan term with a refinance. As of this writing, rates currently are 3.49 percent for the 10-year mortgage and 3.59 percent for the 15-year mortgage. Is it better to take the 15-year with a slightly lower payment and higher interest and make extra payments toward the principal? We are in our 50s and are not sure when we will retire.
— Susan Scenarios
With just the 0.1 percent difference in rates, I like the idea of the 15-year mortgage versus the 10-year. I’m a firm believer in financial flexibility. If you take out the 10-year mortgage, the higher monthly payment is a contractual obligation.
Taking out the 15-year mortgage and making additional principal payments can get you to the same approximate payoff date and gives you the flexibility to skip an additional principal payment if your monthly budget gets a little tight in any particular month.
You didn’t tell me exactly how much you were refinancing, so I put together a table for a $100,000 refinancing using Bankrate’s mortgage calculator and amortization schedule. It showed that you would pay an extra $677.88 to pay off a 15-year mortgage in 10 years and one month at 3.59 percent, versus a 10-year mortgage at 3.49 percent. The table ignores any loss of the mortgage interest deduction on your income tax returns. If you’re refinancing a $200,000 mortgage, then the number would be twice that amount.
Does refi make sense?
|10-year||15-year with additional principal payments||15-year|
|Loan term (months)||120||121||180|
|Additional principal payment||$0||$269.08||$0|
|Total monthly payment||$988.39||$988.39||$719.31|
|Extra interest expense versus 10-year||$677.88||$10,869.04|
You have to decide if it’s worth the additional money to preserve your financial flexibility by using a 15-year mortgage instead of the 10-year mortgage. If you are both secure in your jobs and have an adequate emergency fund, then you probably will use the 10-year mortgage for your refinance.
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