Although a refinance can lower your monthly payments, it may not always be a good idea.
A homeowner who has already paid off ten (10) years of a 30-year loan, would be unwise to refinance to another 30-year loan--even if the rate were lowered. It may even be unwise to refinance to a 20-year or 15-year loan.
For example, consider the following scenario:
- Background. Lisa & Larry bought their home ten years ago with a 30-year $100,000 loan at an interest rate of 9.0%. Their bank is now offering them a new 30-year fixed-rate at 7.50% or a 15-year fixed-rate at 6.75%.
- Staying put. Keeping the current 30-year loan would mean total interest charges of $103,679 for the next 20 years.
- Refinancing to another 30-year is a bad idea. The balance after 10 years would be $89,400. Even for that lower amount, the total interest charge with the 30-year at 7.50% would be $201,150. This would be an additional cost of $97,471. Bad move.
- Refinancing to a 15-year loan would be an excellent idea! The $89,400 loan at 6.75% would have total interest charges over the entire 15-year term of $53,000. That would be a saving of $50,679 over the keeping the current loan.
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