Profile picture for user0253418

Should we Refinance for a lower interest rate?

Hi! Can anybody help make a decission. We have a 15 yr fixed mortage that is due on May 2024. Our current interest rate is 4.88%, making about $1400 monthly payment. We wanted to get it paid as early as possible. We can make an extra payment of $300 a month. The bank has offered us  a 3.99% interest rate but will push it to 20 yr fixed mortgage, no finance charge. Should we refinance and just make the same payment as we are making right now and the extra $300 a month? or should we leave it as it is and just pay the extra $300? Any advice? Thanks!
  • July 19 2012 - US
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Answers (8)

Profile picture for Go Huskers
Assume a $150K balance and 1st payment date of 9/1/12

New 10 Year @ 2.875% Paying regular scheduled payments $1439.77
Payoff September 2022

New 10 year @ 2.875% Paying $1700 (Extra to Principal ($1439.77+$260.23))
Payoff January 2021

New 20 year @ 3.99% Paying $1700 (Extra to Principal ($908.18 + $791.82))
Payoff June 2021 EXTRA $9126.56 in interest more than 10 year at same payment

New 20 year @ 3.99% Paying $1400 (Extra to Principal ($908.18 + $491.82))
Payoff October 2023 EXTRA $12,986.42 in interest more than 10 year at  $1439.77

If your plan is to take a new 20 year and just keep paying the $1400 you are paying, you will be better off getting the 10 year for $39 more per month and you will cut 13 months off the mortgage and save $12,986.42. 

Make sure your lender has exhausted all possibilities to qualify you for the 10 year with your income before you make the move to the 20 year!

Regardless of what your current payoff is, the examples I gave will be proportionately  consistent. Security with a lower payment is at the cost of significant added interest payments. 
  • July 19 2012
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Profile picture for blue screen exile
As already pointed out, there is no reason not to refinance when it won't cost you anything to do so and it will save a substantial amount of money, especially as rates are not expected to be able to drop much further without substantially more government intervention.

The only question is which loan product is right for you. If the payments for the 10 year are the same as you are making, I'm not seeing how "low income" is disqualifying you from that loan product.
  • July 19 2012
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Profile picture for Best Miami Beach
We recommend a re-finance simply because the mortgage rates for 30, 20, and 15 year fixed rates are at record lows. These rates have not been this low even when they were first recorded. If it simplifies your life and saves you money, it would be in your best interest.
  • July 19 2012
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Profile picture for user0253418

Our target is to have it paid in 8 yrs but because we have a low income in the last 3 yrs...the bank has to push it to 20 yr ( $750 a month) but with an interest rate that is almost 1 % less than we currently paying now.

Judith, thats what my husband thought as well.  Incase our income gets worse at least $750 a month is not bad in our pocket.   So I guess, it would save us $$$ if we woudl refinance for a lower interest rate and keep paying the same amount we are paying now and that extra $700 would go towards the principle each month. We would still meet our target or close? You think?

Thanks a lot, folks!

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Profile picture for Go Huskers
Your bank is nuts!! You should get a 10 year fixed at a rate that will facilitate a "no cost" refinance. You could probably drop your rate by 2 full points and save a bundle! With your loan balance of around $150,000 (if I have it right) your 10 year payment would be around $1450 and if you added the extra 250 to that for an even $300 more, you would payoff in November 2020.
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I would look at a new 10 year fixed loan and see if that payment fits well into your plans.   10 year rate will be much better than 20 year.    If that payment is a bit above where you want to be, there are a few lenders who offer "customized" terms, such as 11 year fixed or 12 year fixed.    That could be a good fit for you as well, and the available rate on those should be the same as what you would get on a 15 years (which is still better than a 20).

If your bank is offering you a 20 year, then clearly there is a lack of communication between your objective and what is available to meet those.

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Assume there in no impound in your monthly payments then your balance is about $151K (142 months left to go), and assume that you have average credit score and DTI, I belief that you can get 3.75%, 15 years term without of closing cost (except for the per diem which you had to pay, one way or another) at the smaller mortgage offices (small lenders). if you keep to pay $1,400 monthly on the new mortgage, your new mortgage life is 132 months, you save 10 months of payment or $14,000 on overall of your new mortgage payment.
And if the new rate is 4% and you keep pay $1,400 a month then your new mortgage life is 134 months.
I'm not a lender by the way.

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Another way to consider this is that if you refinance, you'll have more cash available in case of an emergency or loss of income. You'll have the option to pay less if necessary. The other reason you might want to refinance (assuming zero cost to you) is to take the refinance and make additional payments on the new loan. You can have the additional $300 savings automatically applied to your principal which with the lower interest rate, you would be able to pay off the loan even faster, as your principal will be at a lower interest.  You should be able to ask the bank to calculate the pay off time of the 20 year with an additional $300 applied each month. That should give you the answer you're looking for.
  • July 19 2012
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