15 vs. 30

A chance encounter lead to today’s topic. Would it be smart to refi a 30-year mortgage to a 15-year term?

This family bought their home within the past few years and currently has a 3.875% fixed rate on a 30-year loan. They don’t like their loan servicer and don’t want to have a house payment forever, so they wondered if doing a refi would be smart. I also heard about what a pain in the neck the whole loan process was.

Before we begin, note that it’s hugely important to know the “why” of refinancing as you begin. This way, we have something to measure against to know if it’s worth it. Sometimes you could do a transaction but maybe you shouldn’t if it doesn’t satisfy your reason for inquiring in the first place.

At present the house payment before impounds is about $940 per month. If they keep the current loan and just amortized it over 15 years, they can pay an extra $526 per month. No refi necessary, and they keep control over how much extra they want to pay in any given month.

If we write a new loan, maybe they save 0.375% in rate for the least expensive closing costs. The payment moves to about $1415 per month. That’s about $475 more per month than they pay now, and that would be the mandatory minimum payment. If there is a cash flow problem, too bad – the new payment is higher.

When we compare the annual difference in interest cost, it’s shy of $800 per year. The refinance pays for itself very quickly because of the cheap closing costs.

If we run the prepayment of the current loan versus the refi out for seven years, the principal balances are within $1800 of each other. The interest expense over that time is less than $6500 difference, the refi being better.

To summarize, the upside of the refinance is a new loan servicer, a lower note rate, and some interest cost savings over time. The downside is a mandatory higher monthly payment, a quick erosion of mortgage interest tax write-off, and having to do the loan process again.

We’ll see how this family decides to proceed. The point being: A loan request generates data, and while the data can be spun one way or another, satisfying your intent for the financing should be what guides you in the end.

Tammy Engel is your local Mortgage Advisor and has been working for your best interest since 1990. Contact her at 661/822-7325 for purchase, refinance, or reverse mortgage.