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I am in my mid 50s and my wife will retire this year so I will be the sole breadwinner. We took out a 30 year mortgage 3 years ago and our finance rate is currently 6.25%. We are thinking of refinacing at a rate of 4.625 for 20 years. Closing costs would be about $7,000. I am planning on retiring in 12 more years. Is it wise to reduce the years since the rate is lower?
ANSWER
Expert Matthew Peterson's Answer:
It will be most beneficial to answer this question by showing a comparison of the two different loans using a hypothetical principal amount of $100,000.
Scenario A - current 30 year mortgage at 6.25%
Approximate monthly payment: $647
Total paid 27 years from now: $209,628
Scenario B - refi at 4.625% for 20 years, additional cost of $7,000 (added to principal)
Approximate monthly payment: $693
Total paid 20 years from now: $166,320
The difference between Scenario A and Scenario B shows that for every $100,000 in principal, there would be a cost savings of about $43,308 ($209,628 - 166,320) due to the lower interest rate on the loan.
Based on this comparison, I would recommend refinancing especially in considering two additional factors. First, monthly payments are similar amounts so there would not be a large difference in current monthly cash flow. Second, it sounds as though you are planning on staying in the home through retirement so the initial $7,000 closing costs are more than recouped with the lower interest expense. In other words, if you are intending to sell the house within the next few years, then the lower interest rate expense may not offset the amount of closing costs paid to refinance.
