We have five years and about $65,000 to go on a 15-year mortgage at a rate of 5.25%. Is it worth it to refinance to another 15-year loan at a rate of about 3%, assuming no closing costs? We would accelerate our payments because we would still like to pay off the mortgage in five years, about the time we’re eligible to retire.
That sounds like a good plan. “Any time you have the opportunity to significantly reduce your home-loan interest rate -- from 5.25% to 3% in your situation -- you should grab it,” says Mari Adam, a certified financial planner in Boca Raton, Fla. “If you are lucky enough to do this with no closing costs, don’t think twice about the idea.”
Adam ran the numbers to show how much you could benefit from the lower rate. If your mortgage amount was, say, $155,000, your current monthly payment is probably about $1,250. If you refinance the remaining $65,000 at 3%, your monthly payment would shrink to about $450 -- saving you $800 on your monthly mortgage payments.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The downside to refinancing is that you’re taking out a new 15-year loan, which means you could be making monthly payments long after you plan to retire. To avoid that situation, Adam recommends taking the amount you save every month and applying it to your mortgage as an extra principal payment. That would enable you to retire the new mortgage in less than five years -- a little faster than your current pay-down schedule -- and save thousands in interest.
Adam points out another advantage of refinancing: flexibility. “While you may intend to pay the extra principal monthly, you are not required to do so,” she says. “You can adjust your plans if you encounter unforeseen financial difficulties over the next few years.”
At current interest rates, refinancing is generally worthwhile for anyone whose current interest rate is 5% or higher, says Adam. If closing costs are involved, divide the closing costs by the monthly savings to see how many months it will take you to start saving money. Be careful before refinancing to a shorter-term mortgage at a slightly lower interest rate and a higher monthly amount. You could be locking yourself into too-ambitious a payment schedule if money gets tight.
-
Six Missteps to Avoid as You Transition to RetirementDon't lose sight of your finances when you finally reach retirement. These six classic missteps can chip away at the nest egg you’ve worked so hard to build.
-
Why Does One Claim Jack Up My Insurance After Years of No Claims?Even loyal customers can be hit with an insurance premium hike after a claim, despite going many years without any claims. There's a reason for that.
-
Credit Report Error? They All Mattercredit & debt Don't dismiss a minor error. It could be the sign of something more serious.
-
Insurance for a Learning Driverinsurance Adding a teen driver to your plan will raise premiums, but there are things you can do to help reduce them.
-
529 Plans Aren’t Just for Kids529 Plans You don’t have to be college-age to use the money tax-free, but there are stipulations.
-
When to Transfer Ownership of a Custodial Accountsavings Before your child turns 18, you should check with your broker about the account's age of majority and termination.
-
Borrowers Get More Time to Repay 401(k) Loans
retirement If you leave your job while you have an outstanding 401(k) loan, Uncle Sam now gives you extra time to repay it -- thanks to the new tax law.
-
When It Pays to Buy Travel Insurance
Travel Investing in travel insurance can help recover some costs when your vacation gets ruined by a natural disaster, medical emergency or other catastrophe.
-
What Travel Insurance Covers When Planes Are Grounded
Travel Your travel insurance might help with some costs if your trip was delayed because of the recent grounding of Boeing 737 Max planes.
-
Ways to Spend Your Flexible Spending Account Money by March 15 Deadline
spending Many workers will be hitting the drugstore in the next few days to use up leftover flexible spending account money from 2018 so they don’t lose it.
