refinance

Should I refinance right away?

Don TaylorDear Dr. Don,
I recently borrowed $470,000 to buy my home, and I've financed it with a 30-year mortgage at 4.25 percent interest. There are 353 months left. Mortgage rates keep dropping, though, and I recently found out I could refinance at 3.5 percent interest. It would cost me about $8,500 to do so. Should I refinance right away? I plan to keep the house for at least 15 more years.

Thanks,
-- Mike Makeover

Dear Mike,
If you can get a loan commitment at 0.75 percent below your current interest rate, you should jump on the opportunity.

Why do I say that? Reducing your interest expense by 0.75 percent on $470,000 saves you more than $3,000 in the first year of the loan. Over the full 30 years, you save about $59,186.85 in pretax interest expense. Even over your planning horizon of 15 years, you save $43,083.62 in pretax interest expense while reducing your total payments by $33,515.49. You'd even have a lower outstanding loan balance, even though you borrowed an extra $8,500 as shown in the tables below.

Does refi make financial sense?

Loan termExisting mortgageRefinancingDifference
Loan balance$470,000$478,500$8,500
Interest rate4.25%3.5%-0.75%
Loan term (months)3533607
Loan payment$2,334.88$2,148.68-$186.20
Total interest expense$354,211.23$295,024.38-$59,186.85
Total payments$824,211.23$773,524.38-$50,686.85
15 years outExisting mortgageRefinancingDifference
Loan balance:$470,000$478,500$8,500.00
Interest rate:4.25%3.5%-0.75%
Loan term (months):3533607
Loan payment:$2,334.88$2,148.68-$186.20
Total interest expense:$251,909.71$208,826.09-$43,083.62
Loan balance:$301,632.03$300,563.90-$1,068.13
Total payments:$420,277.68$386,762.19-$33,515.49

Your after-tax savings will be less with the loss of any mortgage interest deductions. But it's still better to refinance, even after just seven months in your existing mortgage, and even with a fairly steep bill for closing costs.

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