We have five years and about $65,000 to go on a 15-year
mortgage at a rate of 5.25%. Is it worth it to refinance to
another 15-year loan at a rate of about 3%, assuming no closing
costs? We would accelerate our payments because we would still
like to pay off the mortgage in five years, about the time we're
eligible to retire.
Pay Off the House or Keep the Mortgage?
That sounds like a good plan. "Any time you have the opportunity
to significantly reduce your home-loan interest rate -- from 5.25%
to 3% in your situation -- you should grab it," says Mari Adam, a
certified financial planner in Boca Raton, Fla. "If you are lucky
enough to do this with no closing costs, don't think twice about
Adam ran the numbers to show how much you could benefit from the
lower rate. If your mortgage amount was, say, $155,000, your
current monthly payment is probably about $1,250. If you refinance
the remaining $65,000 at 3%, your monthly payment would shrink to
about $450 -- saving you $800 on your monthly mortgage
The downside to refinancing is that you're taking out a new
15-year loan, which means you could be making monthly payments long
after you plan to retire. To avoid that situation, Adam recommends
taking the amount you save every month and applying it to your
mortgage as an extra principal payment. That would enable you to
retire the new mortgage in less than five years -- a little faster
than your current pay-down schedule -- and save thousands in
Adam points out another advantage of refinancing: flexibility.
"While you may intend to pay the extra principal monthly, you are
not required to do so," she says. "You can adjust your plans if you
encounter unforeseen financial difficulties over the next few
At current interest rates, refinancing is generally worthwhile
for anyone whose current interest rate is 5% or higher, says Adam.
If closing costs are involved, divide the closing costs by the
monthly savings to see how many months it will take you to start
saving money. Be careful before refinancing to a shorter-term
mortgage at a slightly lower interest rate and a higher monthly
amount. You could be locking yourself into too-ambitious a payment
schedule if money gets tight.