Dear Dr. Don,
We have a 30-year fixed-rate mortgage at 4.875 percent with a loan balance of about $580,000. Should we refinance to a 15-year fixed-rate loan at 3.125 percent with slightly higher mortgage payments, or can we get similar benefits if we do an annual amortization? Can you comment and tell us how it might work?
— Sarah Solution
I don’t quite know what you mean by “an annual amortization.” As you probably know, an amortized loan has payments covering both interest expense and repayment of principal over the loan’s life.
You can make additional principal payments to reduce both the interest expense and the loan balance, which will shorten the loan term. If you want to do this annually, you can. Bankrate’s mortgage calculator will let you suggest the additional payments and see how it reduces interest expense.
Refinancing is a better solution than making additional principal payments because of the lower interest rate on the new mortgage. That presumes you’ve been in the home long enough that interest savings offset refinancing closing costs. Bankrate’s refinance interest savings calculator will do the math for you as well, helping to make the case.
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