Should I refinance if I don't plan to stay?

Bankrate.com

Dear Dr. Don,
Would I see enough savings that it would pay to refinance my mortgage? The rate is now 4.25 percent and would be reduced to 3.25 percent if I refinanced. I've had this mortgage for three years, and it's a 30-year mortgage. The refinanced mortgage also would be for 30 years. We don't plan to be in this home for 30 years. We will probably sell this house in 10 to 15 years.

Thank you,
-- Kathleen Continuum

Dear Kathleen,
It makes sense to refinance your mortgage if the interest savings are greater than your closing costs. You didn't tell me the loan balance, so I'm going to run the numbers for a $100,000 mortgage. The numbers will be scalable, so if you're looking to refinance a $200,000 mortgage you can multiply the interest savings by two.

Savings through refinancing

Existing Mortgage

Refinancing

Difference

Loan amount$100,000.00$100,000.00
Interest rate4.25%3.25%1 point
Loan term (months)324360
Loan payment$519.36$435.21$84.15
Total interest expense$68,273.27$56,674.27$11,599.00

Since you don't plan on being in the house for the full term, you won't capture all the savings in the above table. Here's what the savings would look like 10 and 15 years from now.

Savings if you move out early

10 yearsLoan paymentTotal interestLoan balance
October 2022Original loan$519.36$37,675.10$75,351.66
October 2022Refinancing$435.21$28,954.23$76,729.47
Savings$8,720.87$(1,377.81)
15 yearsLoan paymentTotal interestLoan balance
October 2027Original loan$519.36$51,990.45$58,505.30
October 2027Refinancing$435.21$40,273.34$61,936.20
Savings$11,717.11$(3,430.90)

As you can see, the savings look good in a refinance, even if you don't stay in the house for 30 years. Getting a new 30-year loan puts you a little behind on paying down the mortgage balance, but you can turn that around by making additional principal payments each month equal to the $84.16 difference in the mortgage payments.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.



More From Bankrate.com
View Comments (3)