Dear Liz: Is there any downside to refinancing? I have 15 years to go on a 30-year fixed-rate mortgage at 6.625%. I’d like to take advantage of today’s lower rates, but the only way I could lower my payment substantially would be to switch to another 30-year mortgage. We crunched the numbers for a 15-year mortgage, but the payment would be about the same.
It feels odd to sign up for a 30-year loan at age 54, but my primary reason to refinance would be to protect myself in case of the unexpected, such as a job loss. I have no other debt and my credit is excellent.
Answer: The benefits of refinancing wane the longer you’ve been paying down your loan. You’re far enough into your mortgage that refinancing to another 30-year loan will increase the total interest you pay over the life of the loans, even if your interest rate drops substantially.
If your mortgage was originally $200,000, for example, you could pay more than $60,000 in additional interest by refinancing the balance at the midway point, as you’re considering.
There are situations where reducing a monthly payment is so important that it’s worth the extra cost. If you couldn’t afford the current payments or were far behind in saving for retirement, you could make a case for refinancing.
Another option would be to refinance to get lower payments, but make extra principal payments when you can to pay the loan off quicker and reduce total interest costs.
But you’ll want to do the math for your particular situation before proceeding. The mortgage calculators at HSH Associates Financial Publishers, at www.hsh.com, can help.
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