Who wants to give me financial advice? (RE: refi)

I have 22 years left on my mortgage @4.5%. I’ve been paying quite a bit more towards the principle in an effort to get this <10 years.

The lender approached me about refi to 15 years @3.5%.

So for sure there’s potentially a monthly savings, but because I’ve been paying down the principle fairly aggressively anyway, I’m not sure it totally makes sense. Then with the tax implications and the fact that I will probably need to buy a new car this year, the list of pros and the list of cons starts to get confusing. Any thoughts?

Ask the lender for a Good Faith Estimate of the fees. I would only consider that offer if it had no fees (not “the fees are added to your loan balance” but absolutely no fees to close the loan). Even then, it’s not a great offer but you might want to choose it if your partial to your lender or if you want to take the easy route.

My recommendation is to go to amerisave.com, put in your info (house value, loan amount, etc.) and look at their rates. For each term (30-year, 15-year, etc.) there is a range of rates and fees. Look for the point at which the fees are negative. This is a no-fee refinance. I’d bet that you will find that the no-fee rate on amerisave.com is better than that offered by your lender (which probably comes which thousands of dollars in fees).

Now, discussion about whether it’s worth refinancing.

If you can get a true no-free refinance with a lower rate you will pay less in interest over the term of the loan than you are paying now, as long as you choose a term which the same or shorter than what remains on your current loan (refinancing to a 15-year term when 22 years are left on a 30-year loan meets this criterion). It is a no-brainer to refinance in this case unless you are planning to pay the whole thing off in the very near term.

Your monthly payment for a 15-year loan may be higher than the payment on your current 30-year loan. This may be a factor if you don’t have the cashflow to support the higher payment.

Ignore the tax implications. Paying less interest is better even though you end up with a smaller tax deduction. Would you rather spend $5,000 to save $1,250 on your taxes (a net spend of $3,750) or spend $10,000 to save $2,500 (net spend: $7,500) on your taxes? I’d rather pay less overall and take the smaller deduction.

How quickly will you pay off your mortgage at the rate you’re going without the re-fi?

Thank you for the advice so far, Gus Gusterson!

I am trying to pay off the loan in 8 years, but it might be necessary to divert that money towards a new car for a few years instead.

If your primary goal is money to pay for a car, then I can’t see that the refi would provide that. The simple models would suggest that the 15 year @ 3.5% loan would cost more per month than the 22 year @ 4.5%. The money you are currently using to pay down your mortgage is elective, you could choose to put that to a car instead. Whereas if you lock in a new mortgage with a higher monthly payment, that portion of money is no longer elective.

With the secondary goal of paying off the mortgage early, you have flexibility in how much additional you put toward that goal. Maybe you slow that down in order to accommodate a car payment.

If you’ve paid a significant amount of your principle above your original schedule, you can also ask your lender to reamortize your loan. They will take your current balance and rate, the remaining months and recalculate a new monthly payment. This will lower your monthly payment allowing you to either continue paying extra or temporarily divert that to a new car payment.

It can make sense, but get all the numbers together to compare, including the fees. I think typically there will be some difficult to avoid fees related to the costs of the transaction (title company, etc.) and some separate lender fees or “points” that are adjustable along with the interest rate. You’ll need to get detailed quotes from individual lenders in order to tease out the details of this.

If your bank is just approaching you with this I’d strongly recommend getting some additional quotes for comparison, they may not necessarily be in a position to get you the best deal. I used bankrate.com to compile a list of likely candidates, and worked with a number of them to get detailed quotes, in the end picking a broker with one of the lowest rates and fees who gave me a good impression (professional, less used car salesman like, etc.) on the phone.

Seems to have worked out pretty well. We closed today on a 2.875% 15 year fixed, down from a 4% 30 year fixed (with 27 years to go). We put in a bunch of cash to keep the monthly payments roughly the same. The combination of money down, lower rate, and shorter amortization conspired pretty strongly to reduce the amount of interest we’ll be paying. I think it is a good decision for us, but the exact figures and how much you need left over from your monthly income may make the equations work out differently for you.