- The Washington Times - Thursday, August 12, 2010

Q. I read last week that rates on 15-year loans are the lowest in history. We are seven years into a 30-year fixed-rate loan at 5 percent with a balance of $285,000. I would like to refinance to a 15-year loan, but my wife thinks the payment will be too high.

We are not planning on moving, and I would like to pay off our loan as soon as possible. Would converting our 30-year loan to a 15-year loan be a smart move?

A. There’s not a “right” or “wrong” answer in your case. Indeed, refinancing to a 15-year loan would save you thousands in interest costs because of a lower rate and shorter term, but as your wife aptly points out, your monthly obligation will increase. Perhaps not as much as she might think. Let’s take a look at some numbers.

If you have 23 years left on your loan with a balance of $285,000, my calculator tells me your original balance was about $325,000 and your existing monthly principal and interest (P&I) payment is about $1,745.

Refinancing the remaining balance to a new 15-year mortgage would carry a rate of about 4.25 percent with no points or closing costs. The monthly P&I payment would rise to $2,144 - an increase of $399.

The first thing you should do is evaluate whether this payment increase is affordable based on your other expenses. You should take into consideration future expenses not normally counted for mortgage qualifying purposes, such as college tuition.

If you and your wife decide the extra payment is manageable, a 15-year refinance would make plenty of sense. The simple numbers don’t lie. An extra $399 per month for the next 180 months equals a total additional payout of $71,820.

Continuing to pay your existing 30-year loan would keep your payment the same, but 15 years from now, you would still owe about $123,500 on the loan. It would take an additional seven years with the existing P&I payment of $1,745 to pay off the loan. Eighty-four additional payments of $1,745 equals $146,580.

The bottom line is this: Increasing your existing payment by $399 per month for the next 15 years, totaling $71,820, will save you a total of $146,580 in payments over the remaining 84 months, resulting in a net savings of $74,760.

You and your wife need to discuss whether making the higher payment will have an adverse affect on other aspects of your life. If you decide the payment on a 15-year loan is too high, consider a 20-year fixed rate.

With no points or closing costs, the rate is about 4.50 percent and the P&I payment would be $1,803 - an increase of just $58. An extra $58 over the next 20 years totals $13,920, but you would shave three years off your existing term, saving you 36 payments of $1,745, or $62,820, resulting in a net savings of $48,900 - without a severe payment shock.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to [email protected].

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