Mortgage refinance is personal choice

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Dear Dr. Don,
I’m thinking about a refinance. Currently, I have a 30-year 5.25 percent fixed-rate mortgage. The loan balance is $113,000. The home is worth between $380,000 and $400,000. I have good credit and no other real debt, and am just looking to reduce the interest I pay on the loan. I have 24 years left on the current loan and wonder if I should refinance to a 15-year loan (4.25 percent to 4.5 percent).

The other option is to add about $200 a month ($2,400 per year) toward the principal on my current loan to reduce the term by eight years and five months. That would reduce the loan to 16 years. It seems that refinancing is better since the mortgage is paid in 15 years, and my monthly principal and interest payment increases only $120. Is this accurate?

Would you recommend the 15-year refinance or paying down my current mortgage?
— Ron Refi

Dear Ron,
Inputting your mortgage rates and terms into Bankrate’s mortgage payment calculator, I came up with different numbers than you did. I have your monthly payment being $26.44 a month less with the 15-year loan when compared to paying an additional $200 a month on top of your existing mortgage payment.

Use the Bankrate calculator with your exact loan balances and remaining loan term to make this precise for your mortgage. I used the upper end of your interest rates for the 15-year loan because, as I write this, Bankrate’s national average for a 15-year fixed-rate mortgage is 4.73 percent.

Mortgage payment scenarios
  Original mortgage +


15-year fixed-rate


Loan balance  $       113,000.00  $      113,000.00  
Interest rate 5.25 percent 4.50 percent  
Loan term (months) 288 180  
Mortgage payment  $          690.89  $          864.44  
Additional principal  $          200.00  $              NA    
Total monthly payment  $          890.89  $          864.44  $    26.44
Payoff date 15.5 years 15 years  
Total interest  $    52,202.63  $    42,599.63  $  9,603.00

You save about $10,000 pretax in interest expense by refinancing into a 15-year loan.

If you can fully use the mortgage interest deduction on your income taxes, the difference is less on an after-tax basis based on your marginal federal income tax rate. To fully use the mortgage interest deduction, your itemized deductions including the mortgage interest expense must be greater than the standard deduction by at least the amount of the mortgage interest expense.

Neither your analysis nor mine considered the dollar cost of refinancing. That would also diminish the difference between the two alternatives. You’d also have to stay in the house for the next 15 years to capture all these interest savings. Use Bankrate’s “Refinance interest savings calculator” to view a detailed report on the interest savings from refinancing.

Don’t ignore closing costs and income taxes when it comes to deciding whether to refinance. There’s also a measure of financial flexibility in staying with the current mortgage. If you get in a financial bind, you can temporarily halt the additional principal payments on your existing mortgage. Switching to a new 15-year mortgage makes the higher mortgage payment contractual and you won’t have that measure of financial flexibility.

If you can fully use the mortgage interest deduction and you’re paying about $3,000 in closing costs, refinancing will capture about $3,000 to $5,000 in after-tax interest savings over the next 15 years. Is it worth it? That’s up to you. That’s why they call it personal finance.

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