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.