Ask Our Broker With Peter G. Miller
By Peter G. Miller
CTW Features
Question: We’ve owned our home for several years. We’re in our 40s and do not look forward to making mortgage payments for the next three decades. Is now the right time to refinance and switch to a 15-year mortgage?
Answer: Going from a 30-year mortgage to a 15-year term has some attractions. For one thing, the potential interest cost for the loan is significantly lower. As an example, imagine you borrow $200,000 at 4 percent over 30 years. The potential interest cost is $143,739 versus $66,288 for a 15-year mortgage with the same initial balance at the same rate.
The lower potential interest cost associated with a 15-year mortgage is not free. It’s achieved by having a higher monthly payment. For example, the 30-year note will have a much smaller monthly payment for principal and interest: $954.83 vs.$1,479.38 for the shorter loan.
In practice, one would expect the rate for a 15-year mortgage to be roughly .75 percent lower than the rate lenders want for a standard 30-year loan. The lower rate also means a lower potential interest cost for a 15-year loan.
In your current situation, you’re not refinancing a 30-year loan. What you’re refinancing is the remaining loan term. If you’ve been in the property for five years, you effectively have a 25-year mortgage.
If you elect to refinance there are several questions you should ask:
• What is the new interest rate?
• What is the new monthly payment for principal and interest?
• How much will it cost to originate a replacement mortgage?
Think of all the expenses you will have to pay with a new mortgage.
Alternatively, you might want to consider applying the thousands of dollars it would cost to refinance your property to your outstanding loan balance. That way, 100 percent of the money will go toward the goal of less debt instead of fees, charges and taxes.
If you are comfortable with a higher payment, why not simply increase the amount you pay each month? Most payment coupons have a line for “extra principal” that you can simply fill in when you write a check.
While making prepayments will not produce a lower interest rate, it gives you flexibility if you run into financial trouble – your mortgage obligation is to pay the minimum amount. That’s a much smaller number with a 30-year loan when compared with 15-year financing.
© CTW Features
Peter G. Miller is author of “The Common-Sense Mortgage,” (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.
