Refinancing This Mortgage Makes Sense

Last Updated Oct 6, 2011 10:10 AM EDT

Refinancing This Mortgage Makes Sense

I often get questions from readers and sometimes I'll answer them here. If you have questions you'd like to ask, please email me by clicking on the "Contact Ray Martin" link to the left.

QUESTION:

I currently have a 15 year mortgage with 13 years remaining on the loan with a 4.75% interest rate. I am thinking about refinancing it with a 10 year mortgage. Mortgage interest rates look like 3.25-3.75%. My question is this: is it worth the expense of closing costs to do this? I plan to retire in early 2014 and would have about 10 years on my current mortgage versus 7+ on the refinance if I did it now.

Melody


RAYS ANSWER
Great question Melody!
To answer this question, I'll need to make a few assumptions. Let's assume a loan of $200,000 and $2,500 in closing costs, which would be typical. Now let's run the numbers to get to the answer.
· The total interest you will pay over the remaining 13 years on the current mortgage would be $61,879
· The total interest you will pay on the new 10-year mortgage would be $37,326
So here's the deal: if you continue with the current mortgage, you will pay about $61,879 in interest over the next 13 years.
However, if you refinance to the 10-year mortgage, with an interest rate of 3.5%, and pay $2,500 in closing costs, the total of the closing costs and interest paid over the next ten years will be $39,826.
So, the ten year mortgage will save you over $22,000 of interest over the next ten years.
Another advantage is that you'll have paid off your mortgage three years earlier, and since you plan to retire soon, that is a big advantage.
The one downside of the ten year mortgage over the current mortgage is that it will have a larger monthly payment. The monthly payment for the current mortgage is $1,556, and the payment for the 10-year mortgage is $1,978.
So, just be sure you have the spare cash flow to make the larger payment, and you should be good to go!
  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.