When is Mortgage Refinancing a Good Move?
Dear Dr. Don,
My mortgage lender is offering to refinance my loan at a lower rate due to my excellent payment history. Here's my current situation: I have seven years left on my mortgage. I owe $81,500 at a fixed interest rate of 5.5%.
The lender is offering me a loan at 4.13% with no closing costs or any expense other than interest. I pay my taxes separately. I do not see the advantage, other than lowering my monthly payment and saving interest on the remaining years. I need to be able to calculate the interest savings and how much my payment will be lowered to determine if this is a good offer. Can you help me with these calculations?
-James
Dear James,
There are two key things to consider before taking advantage of this offer. First, is the new interest rate a fixed rate? Second, is the loan term the same as your existing loan?
Extending the loan term can increase the interest expense, even if it's at a lower interest rate.Bankrate's mortgage payment calculator will calculate the monthly payment and will provide an amortization schedule that shows the total interest expense for the new loan. You can also enter the particulars for your existing mortgage loan and determine its total interest expense.In addition, you can use Bankrate's refinancing calculator to determine how much you'll save by refinancing. I ran the numbers, too, and my results are shown below:
You also should recognize that the interest savings may be less on an after-tax basis if you can fully utilize the mortgage interest deduction on your income taxes. In that case, you can estimate your effective savings as the difference in interest expense, times one minus your marginal federal income tax rate. If you're in the 25% bracket, then your effective savings after tax would be $4,390 x (1 - 0.25), or around $3,293.
Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.
Ask the adviser
To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.