Future plans key to mortgage refinance

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Dear Dr. Don,
I am confused about whether or not I should refinance my mortgage. I have a 30-year, fixed-rate conventional mortgage at 7 percent interest. I bought the condo in 2006 with my first loan payment due on Sept. 1, 2006. The price of the condo was $99,900 and I made a $10,000 down payment. The loan was $89,900. I have made some additional principal payments and I currently owe $81,700.

When inquiring about a refinancing, I was quoted a 5.38 percent interest rate. I will be paying about $4,500 in closing costs which will be included in the mortgage. I also would have to pay private mortgage insurance on the new mortgage loan. Do you think I should refinance?
— Conflicted Christy

Dear Christy,
Mortgage interest rates have backed up some recently. As I write this, Bankrate’s national average on a 30-year, fixed-rate mortgage is at 5.65 percent. My point is that the 5.375 percent rate may no longer be available to you.

A big consideration about whether to refinance your mortgage is how long you plan to remain in the condo. If you’re a short-timer, the rather high closing costs make it difficult to justify refinancing. Paying 5.5 percent in closing costs to bring down your interest rate by 1.625 percent doesn’t make sense for a short-timer. That’s especially true when you consider the new loan also requires private mortgage insurance, or PMI.

Because you plan to pay PMI and to finance your closing costs, I want you to use the Mortgage Professor’s refinancing calculator “Refinancing One FRM Into Another FRM” in evaluating the decision to refinance. You’ll also want to be sure there’s no prepayment penalty on the existing loan before committing to a refinancing.

Read more Dr. Don columns for additional personal finance advice.