Refinance or Not?

June 24, 2010 7:36 PM

Refinancing interest rates for a 15 year fixed mortgage are down to 3.75% at my CU. Meanwhile, I'm 5 years into a 30 year mortgage and thinking it might be a good time to refinance. I want to sell my house, but I don't know when I'll be able to since the market for sellers is so depressed. So it makes sense to cut the time nearly in half and reduce the interest rate by a third for about $50 more dollars a month.

Plus, I've overpaid a little over the last 5 years and now have a few thousand dollars cushion. I could use that money as the new downpayment/closing cost payment and it wouldn't be rolled into the new mortgage, saving me money.

But with the shakey job market, I realized that if I didn't refinance, and instead of letting the mortgage company cut me a check for that cushion or applying it to principle, it could also pay my mortgage for a few months if I lost my job or my hours got cut back. So I'm looking for suggestions. Refinance, lose the cushion and benefit from lower interest, shorter term and higher payment. Or stand-fast, keep the cushion and stay focused on selling the house?

posted by CollectiveMind to Work & Money (5 answers total)

If you think you will sell your house in the next 5 years, then run the numbers for 5 years of interest payments under your current loan and the hypothetical re-fi. How much money would you save under the re-fi? Without that number, I don't think you or anyone else can make much of a judgment. Be sure to deduct any costs for the refi and also apply the mortgage interest deduction.

My guess is that the savings will not be that great over a short time period, but it's impossible to know without a hard comparision between the two loans.
posted by Mid at 8:46 PM on June 24, 2010

To the best of my knowledge, the "cushion" you got by paying extra toward principal over the past five years exists only in the sense that your equity in the house is somewhat greater. If you refinance and roll any closing costs into the new loan, then your equity in the house will be somewhat smaller. I'm not aware of any scenario in which you can reclaim that cushion without refinancing.

But Mid is exactly right: The only way to compare the two options is to compare amortization schedules. When you do that, you want to look also at how your equity in the house varies in the two scenarios when you expect to sell the house. That, in essence, is your bottom line.
posted by DrGail at 3:33 AM on June 25, 2010

Another factor to look at is if either mortgage is assumable; when interest rates go up a 3.75% fixed rate might be a selling point if you can pass it along to the buyer. You might want to run the numbers on a 30 year mortgage as well; it might make more sense for you to put money into savings rather than build up equity in a house you plan to sell soon.
posted by TedW at 5:58 AM on June 25, 2010

Best answer: 3.75 for a fixed rate 15 year is a pretty good deal, though if it's only a 1/3 reduction, you must have a pretty low rate already.

I'm not sure what you mean by "cushion". Are you talking about equity or what?

If you are planning on selling the house, refinancing probably isn't the best idea. It takes time for a refi to pay off once you include the closing costs.
posted by madajb at 9:43 AM on June 25, 2010

The only way to know for sure is to run the numbers.
posted by madajb at 9:44 AM on June 25, 2010