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When to refinance?
I only have 5 years left on my mortgage, but rates are so much lower now. Should I refinance?
May 5, 2003: 2:28 PM EDT
By Walter Updegrave, Money Magazine

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NEW YORK (CNN/Money) - I'm within a few years of retirement and have about five years left on my mortgage. Today's mortgage rates are about one and a half percentage points below the rate I'm currently paying on my mortgage. Should I consider refinancing even though I don't have long to go on my original loan?

-- George Hicks, Wayne, New Jersey

With seemingly everyone refinancing these days, I can understand why you might think you ought to jump aboard the refi bandwagon too. After all, you can lower your mortgage rate by one and a half percentage points.

Some people these days are refinancing loans they refinanced just a year or so ago because they can save just a half of a percentage point. So a drop in interest rates three times that amount has got to be a good deal, right?

Look at the numbers, first

Not necessarily. Let's step back and look at a few numbers here. You didn't give me the original amount of your mortgage or your current rate. But just so we have some numbers to work with, let's say that your original loan balance was $150,000 loan and that your interest rate is 7.5 percent.

That would put you about one and a half percentage points above today's going rate of roughly 6 percent. Principal-plus-interest payments on a $150,000 7.5 percent loan are about $1,050 a month. And with five years to go, the remaining balance on your loan would be about $52,500.

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Now, you could certainly lower your monthly payment by refinancing your $52,500 balance with a new 30-year loan. In fact, the new payment, assuming a 6 percent rate, would be about $315 a month, or 70 percent less than the current payment. But that reduction in payment would be almost exclusively the result of stretching out the term of your loan, not lowering the rate.

You would have a small net saving because you're paying a lower rate on your remaining balance, although even that might disappear depending on what closing costs you would incur on the new loan. Plus, you would be committing to 30 more years of payments just as you're going into retirement. Unless there's some compelling reason why you can't continue making the last five years of your payments as they are now, this route doesn't seem worthwhile to me.

Look at the alternatives

An alternative would be to refinance just the remaining balance of your loan for five years. That way you wouldn't be stretching out the term.

So, again using the figures above, let's assume you pay off your $52,500 mortgage balance by taking out a five-year 6 percent loan. The payment on the new loan, however, would be $1,015 -- not much in the way of savings. And that's before any refinancing costs. So even if you could find someone to give you a five-year fixed-rate loan at 6 percent -- which I doubt -- it wouldn't seem to be worth the trouble.

Of course, you could do a cash-out refinancing -- that is, refinance your existing mortgage by taking out a larger one and coming away with some cash. If you really need the cash for some reason, now could be a good time to do a cash-out refi, what with interest rates being so low.

But if you don't need the cash, then I don't see the point of doing this. After all, as low as rates are, you are still paying for the loan. Plus, you should keep in mind that if you do a cash-out refi, all your mortgage interest may not be deductible.

Basically, you get to deduct interest on the portion of the loan equal to the outstanding balance on your mortgage, plus $100,000, but not on anything beyond that. You should also know that while points paid to get an original mortgage are usually fully deductible in the year paid, points in a refi must usually be deducted over the life of the loan. For more on refi tax issues, click here.

Survey says: Probably not a good idea

So, all in all, unless you really need to lower your monthly mortgage nut or you need to pull some cash from your home, I'd say you should probably resist the siren song of refinancing and stick with the existing loan.

And if your needs change after you retire, you'll still have the option to tap into your home equity via a new mortgage, a home equity loan or line or, for that matter, even a reverse mortgage that could supplement your retirement income.


Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged."  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.