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The refi decision

By Holden Lewis ·
Thursday, August 19, 2010
Posted: 3 pm ET

Hoisted from the comments to this post about a three-day shopping period for mortgages, reader Debra James explains why she reluctantly decided not to refinance into a 15-year mortgage, even though she will forfeit the application fee. Instead, she will keep the current mortgage and make extra payments that would pay off the loan in almost 16 years. (This is an excerpt; the full-length version can be found at the link above):

Current loan: $300,000 balance, 27.5 years remaining, 4.875% rate, $1,651 payment; $434 principal, $1,217 interest.

15-year refinance: $3,800 closing costs, 4.25% rate, $2,256 payment; $1,038 principal, $1,218 interest.

I would not roll closing costs into mortgage, but pay for them upfront. The current pathetically low savings account rates don't warrant me keeping that money in the bank vs. not paying those costs upfront.

Self-imposed 15-year mortgage: $1,651 + $605 [in extra monthly payments] = $2,256; $1,038 principal, $1,218 interest. The remaining 11.5 payments vs. 15-year mortgage equals $25,944. If I subtract the amount of the $3,800 closing costs of the 15-year mortgage, I would pay an extra $22,144. That's not chump change, but if I divide that amount over 15 years, that equals $123 per month.

However, if instead I add [another] $99 to the payment I would finish paying the mortgage in 15 years; $1,137 principal, $1,218 interest.

I am definitely not a financial whiz, but I just don't see enough of a benefit of getting a new mortgage. For less than $100 more than the bank quoted 15-year mortgage payment, I could finish paying the mortgage at the same.

Conversely, starting next August, if I make an annual lump-sum payment of $8,448 (that's the $704 monthly extra amount x 12), I'd be done with the mortgage just two months later than the 15-year mortgage. Plus, I would have the opportunity to earn some paltry interest on this money in a 12-month CD before I make the annual payment.

I have stated in other posts that I would jump on a refinance in a heartbeat if the interest rate I was offered was 4% or less with no points (I won't pay points, because there is no tax break if I use my existing lender, and you already know I won't roll them into the mortgage).

People pay off their mortgages early for different reasons, and I have heard arguments for and against this train of thought. Some people advise that an affordable mortgage shouldn't be paid off early, but instead use the extra money to invest. Others say there is no specific dollar amount for peace of mind knowing that you don't have a mortgage payment. I like the comfort of having liquid money and investments, but I also can relish the idea of being mortgage-free. Since I am not fully sure which way I want to go, I think I will not get the new mortgage. My plan right now is to buy a $10,000 CD, and make the annual payment as I previously mentioned.

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September 01, 2010 at 3:10 pm

We decided not to go through with refinancing. Or current mortgage is 15-year at 5.25% with seven years to go. We were offered 3.875% for another 15-year mortgage, which would save us 100 dollars in interest per month and would cut our mortgage repayment schedule by a few months if we kept making the same peyments. But closing costs would not amortize for three and half years. We are planning to move within three years and we decided that saving money towards larger downpayment on the next house was better use of the funds.

August 26, 2010 at 9:36 am

I am in a similar situation and opt for a 20 year mortgage at 4.25 with 0 closing cost. My current 30 year rate is 5% and I already make 2 extra mortgage payments a year.. My principal will increase by 130\ month. If I continue to make one extra payment a year I will shorten the life of the loan by 2 years..