Refinance for less?

Q: We own a second home that our daughter is living in. We currently have a 4.875% interest rate for a 30-year loan, owing 19 more years. We are considering refinancing at a 3.25% interest rate but the loan will revert back to 30 years. Our daughter has health issues and financial issues so this would reduce her monthly payment by about $180 a month. Good move or poor move? A: You have financing at 4.875% that you can replace with a bright-and-shiny new mortgage at 3.25%. I say your current mortgage is due for a tradeImagine that the present loan was originally for $200,000. At 4.875% the monthly payment over 30 years for principal and interest is $1,058.42. Refinance $200,000 at 3.25% and the monthly payment is reduced to $870.41. The interest cost for the new financing will be $113,347.60 over 30-years. You don’t want to refinance because a new mortgage for 30 years will create a needless large interest bill. Here are several options. First — and here’s the big point — you don’t need to refinance $200,000. Your current loan has been outstanding for 11 years. It has been amortized (reduced) with each monthly payment. If you started with $200,000 then after 11 years the remaining balance is $157,158. If you finance $157,158 at 3.25% the monthly payment over 30 years for principal and interest will be $683.96 and the total interest cost will be $89,068. Second, you may want to refinance for less than 30 years. With a 20-year mortgage, the new monthly payment for principal and interest will be $891.39 and the potential interest cost will be $56,776. With a 19-year mortgage, the new monthly payment for principal and interest will be $924.78 and the potential interest cost will be $53,692. With a 15-year mortgage, the new monthly payment for principal and interest will be $1,104.30 and the potential interest cost will be $41,616. Each option gives you a different combination of monthly costs and potential interest expenses. In addition, two of the shorter options also produce monthly savings. Third, you might want to have a prepayment program. Perhaps refinance for 20 years and then, if comfortable, chip in additional principal payments each month. Each payment will shorten the loan term and lower the total possible interest cost. For instance, the 20-year option requires a monthly payment of $891.39. Add a principal prepayment of $50 a month and the loan term is reduced by 18 months while the potential interest cost drops to $52,159. Fourth, get cashout refinancing. The remaining loan balance in this example is $158,158. If you refinance for $200,000 then the monthly cost for principal and interest over 30-years will be $870.41 while the total possible interest cost will be $113,348. With this option you can — if you elect — give your daughter a substantial amount of cash. There are other combinations of loan amounts and loan terms for you to consider. However, if you believe interest rates will rise in the future as a result of inflation, changes in the economy created by the coronavirus, or both, then now is the time to act. For a specific review of your options, please speak with mortgage loan officers in your community.