Here’s When you Should Refinance Your Mortgage

I received an email request recently that I thought would be of interest to readers of figuide.  The request read like this: 

“I currently have 5 1/2 years remaining on a 15 yr. mortgage at 5 1/2 percent.  I owe $96,000 on the mortgage.  Does it make sense due to the time remaining on the loan to refinance at this time to a 15 yr. loan?  I know I would drop at least 2 percentage points of interest, but do I need to consider the amortization schedule in regards to interest vs. principle paid each month when making this decision?”

To answer the question I went to a website that offers free mortgage calculators with amortization schedules and sent back the following information:

 “At your current rate of 5.5% with 5 1/2 years remaining, your Principal and Interest payment should be around $1684/month.  You will pay $15,469 in interest over the next 5 1/2 years.  Let’s say you refinanced at 3.5% for 15 years, you would drop your Principal and Interest payment to $684/month, but would pay $27,531 in interest over those 15 years.  So the simple answer is no it doesn’t make sense to refinance if your ultimate objective is to save money.”

“However…. It DOES make sense to refinance if you could drop the rate to 3.5% but continue paying the $1684/month as with your old loan.  In this scenario you would pay $9000 in interest and have your loan paid off in approximately 5 years .”

Now, of course closing costs are not figured in to any of these calcuations so that would have to be taken into consideration.  But in general a refinance does make sense as long as you are disciplined enough to continue paying the same mortgage payment.

If you did refi to a new 15 year, but kept paying (adding additional principal) like your old payment of $1684/month, then you would come out ahead by paying off the loan in about 5 years and only $9k in interest.

About the author

James A. Daniel, CFP®

James Daniel, CFP is the owner of The Advisory Firm, LLC a fee-only financial planning practice located in Alpharetta, Georgia.

2 Comments

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  • Hi Nancy,
    Unfortunately there isn’t a way to “borrow” from an IRA. You can borrow from an active 401k retirement plan, but only if you or your husband are still employed with the company offering the plan.

    My advice would be to sit down with a fee-only financial planner in your area. It will be well worth your money and time to have them help you come up with a strategy. It could also help you avoid big financial mistakes that could impact your retirement goals.

    http://www.napfa.org to find a fee-only planner in your area.

  • Hi James,
    My husband and I are both age 65 and nearing retirement. We want to wait until 70 in order to maximize eventual Social Security benefits but he will file and suspend so I can get spousal benefits starting at his 66th birthday (or mine, not sure how that works yet.) Since we will be waiting so long, our income will drop before age 70, we want to fill that gap. In particular, we plan to purchase a smaller home now but before we’ve sold our larger one. Is there any way to borrow from one’s IRA’s once separated from employment? We’d like to withdraw about 200K for a couple of years and put it back in if we can find a way to do that. That would be about 20% of our total IRA holdings.
    Thanks, Nancy in Seattle

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