Q. Our current mortgage balance is around $344,000, the interest rate is 4.8 percent and we have about 320 months remaining. We are considering refinancing options. We have been offered two true no-closing cost loan options: a 30-year mortgage at a rate of 3.5 percent and a 15-year mortgage at 3 percent. We are both working and have been paying $500 a month extra toward principal and interest, and if we took the 30-year mortgage we could pay an extra $1,000 until we retire in 5 years and then drop this to $500. We know that the lower interest rate for the 15-year would have us paying a lower total amount, but we are worried about the higher payment once we retire. It sure seems like a lot of paperwork; is it even worth it to refinance, or should we just keep our current mortgage?
A. If you think saving a minimum of $56,300 is significant then the paperwork is worthwhile. Refinancing requires a lot more paperwork than in the past, but with the low interest rates this is a great time to refinance. If you are both still working and have credit scores above 740, you shouldnt have any problem qualifying for the rates quoted.
Ask your mortgage broker/lender to run some amortization schedules for you with the different payment schedules. My numbers wont be totally accurate, but they should be close enough to help with your decision. If you remain with your current mortgage, the approximate total of your remaining payments will be $612,400. By changing to the 3.5 percent, 30-year mortgage the total payments will be around $556,095, and total payments with the 3.0 percent, 15-year mortgage will be around $427,600. If you pay the extra $1,000 for 5 years and then continue with a reduced amount toward principal of $500, your total payments with the 3.5 percent, 30-year mortgage will drop to around $451,600, and the mortgage will be paid off in about 17 years.
If you are worried about cash flow when you plan to retire in 5 years, the 30-year mortgage would probably be best for you. This will provide more flexibility since the required monthly principal and interest payments will be at least $800 less than the 15-year mortgage.
Even after your planned extra payments, the required payment is still $300 less than the 15-year mortgage. If you can get a 5 percent after tax return on the $300 a month, in 10 years you would have accumulated more than $46,000 almost double the amount you would save with the 15-year mortgage. A return on investment isnt a sure thing, but combined with the mortgage-interest deduction and your plan to make additional payments you could actually come out ahead with the 30-year mortgage.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 99466, Raleigh, NC 27624