Should I refinance if I plan to pay off my mortgage early?

Question

I am thinking about refinancing my mortgage but need insight. I purchase the home in 2011 on a VA loan at 4.375% for $336,000.00 (that includes all the fees. etc) I have excellent credit, I think I can get under 3% for a new loan, but my question is, is it worth it? The fees that come with refinancing seem ridiculous to me. I plan on paying this off within 10 years, by simply paying more on my principal. Right now my payment is $1,683. I usually pay an extra $500-$1000 each month plus once year add a big payment. What are your thoughts? Refinace or just make the extra payments. My goal is to just pay off the loan.

Thank you!

Lan

Answer

I don’t have all the information to be precise, so this is strictly an estimate. It looks like you’ll be paying just about the same amount of interest payment in both cases (pay current loan down in 10 years, or refinance to a new 15-year loan at a lower interest rate); however, you’ll probably lose out on the refinancing option because of the closing costs. Moreover, you’ll lose the greater flexibility you have with your existing loan.

That said, I’d like to ask you a question: Is paying down your mortgage early the best option for you? For example, could you use the money to:

  • Max out your retirement accounts,
  • Pay off higher interest debt, or
  • Invest?

Here is a real life situation. I have 3 mortgages and I am not in a rush to pay any of them because the interest rates on them are really low. At the ~3.6-3.9% I am currently paying on these loans, I am not paying all that much real interest rate after factoring in inflation over the next 30 years. My preference is to improve my current cash flow and leverage debt to invest in rental properties.

To sum it up, if your goal is to pay down your debt as fast as you can, I don’t think the two options will make that much of a difference. However, if you’re planning to pursue this course, it might be worth it to have a professional run through the numbers for you and figure out the exact difference. On the other hand, if paying off debt is not your highest priority, you might want to take the time to consider what else you can do with your money.

I hope this helps.

Pinyo

About the Author

By , on Oct 24, 2012
The following is a question submitted by our reader. You can see all questions submitted here, and submit your question here. Please remember that our answers are opinions and should not be considered professional advice and we assume no responsibility of any kind. Please consult a financial expert as needed.

Leave Your Comment (4 Comments)

  1. daveM says:

    I suggest that you talk to more than one lender/broker and develop a spreadsheet so that you can document and compare all costs and the effective rate of interest on each loan offer. I am almost sure that you can get several competitive quotes by dealing with different brokers and institutions. From my experience you need to talk to at least three people to ensure that you are getting good information. It may be well worth your time to study carefully.

  2. Jenna says:

    Sounds like you should talk to your lender about refinances before making any guesses.

  3. Pam says:

    I was thinking about refinancing my home but thought I would pay it off instead. I think it is very important that you look at your new interest rate and go from there.

    Pam

  4. Joshua says:

    Thanks for the information.

    I was faced with the same dilemma a couple of months ago, but I was later convinced to go with refinancing. The key is to continually pay the _same_ amount each month as I am doing now with my existing loan even though the new loan may require a lower monthly payment.

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