Couple Arguing Over Refinancing Mortgage

By Dr. Don Taylor, Ph.D., CFA, CFP,

Dear Dr. Don, 

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My husband and I are in a disagreement about refinancing our home loan, but there's more to it than that. We are several years into a 30-year fixed-rate mortgage.

We now have a rate of 4.65% and owe $120,000. My husband has found a deal for a 15-year mortgage that would drop the rate to 2.6%. The problem is that we would have to pay down at least $20,000 on the mortgage and pay another $2,000 in fees.

There will be no private mortgage insurance. Our tax records show the house is worth around $126,000, while homes around us have been selling for up to $100,000.

Complicating matters, I would like to get a bigger house when I go back to work in the next three to four years. I also don't like having an additional $20,000 tied up in this house. I checked out an amortization schedule and found we would break even after seven years.

Any advice on how we should proceed? It seems like the question is whether to refinance with a 15-year loan and pay $20,000 or stick with our current mortgage while making additional principal payments.


-Nicole Nickels

Dear Nicole, 

From where I sit, you both are using questionable math trying to justify your arguments.

The value on the tax roll isn't relevant when refinancing your mortgage. You might want to consider appealing the valuation to reduce your property taxes, but that is a totally different question.

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What the lender wants to know is the home's appraised value. Assuming the recent home sales in your neighborhood are comparable to your home, the appraisal should come in at around $100,000.

Where your husband's math is lacking involves the suggestion that you need an 80% loan-to-value ratio on a conventional mortgage to avoid private mortgage insurance, also known as PMI. If doing a cash-in refinance and bringing $20,000 to closing when you owe $120,000 suggests you need a $100,000 mortgage. That scenario is highly unlikely with a conventional loan. In actuality, a conventional mortgage lender would want you to bring $40,000 to closing, so the mortgage would only be for $80,000. That assumes the home appraises at $100,000 resulting in an 80% LTV and no PMI.

If you refinance with a 15-year loan, you're saving on interest expense in two ways. There's the lower interest rate and the shorter loan term. Breaking even, as measured by reduced interest expense versus closing costs, would take nowhere near seven years. You could look at the lost investment income on the cash you brought to closing and the higher monthly payments, but it should be outpaced by your interest savings.

You've already got that $20,000 invested in your home; right now, you're borrowing the $20,000 at 4.65%. You're hoping that your home's value will appreciate so you don't have to come up with the cash when you sell this home to buy your next home. If you sold the house for $100,000 you'd have to bring $20,000 to closing. That's just like what you'd have to do if you could refinance the property with a $100,000 mortgage, which seems unlikely.

If you've got the money to do a cash-in refinancing and can afford a 15-year mortgage, it would be a great way to get ready to buy the next house. Additional principal payments on the existing mortgage will build equity and save some interest, but not as much as refinancing into a 15-year mortgage. Good luck!

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