- - Thursday, May 26, 2011

Q. My wife and I are considering refinancing our mortgage. We have a 30-year fixed rate at 5.375 percent with a balance of about $283,000.

The loan officer at our bank suggested we refinance to a new 30-year fixed rate at 4.25 percent, dropping our payment by $345 per month. While this is appealing, my wife accurately pointed out that we would be starting from scratch by refinancing to a new 30-year loan. We have 23 years left on our current loan.

Also, the Good Faith Estimate showed that our new loan amount would be $294,000 to cover the closing costs. Our loan officer told us not to worry about the loan balance because we would never hold the house for 30 years to pay off the loan off anyway.

We certainly don’t plan on moving anytime soon, but I’m not sure this makes a lot of sense. What do you think?

A. That’s a terrible deal and your loan officer is giving you terrible advice. Telling you not to worry about the fact that the refinance would put you $11,000 more in debt is unconscionable.

Because I’m a spreadsheet nerd, I put your numbers in a comparative amortization schedule. Five years after the refinance, your loan balance would drop to $266,975 and you would have saved $20,700 in payments. On the other hand, if you don’t refinance, you wouldn’t save the $20,700, but your loan balance would drop to $247,692 - $19,283 lower.

Your loan officer’s assertion that the loan balance doesn’t matter because you won’t hold the loan for the full 30-year term is ridiculous. If you decide to sell in five years, you can see that the $345 monthly savings goes away because you owe almost $20,000 more to pay off the loan. If you sell in 10 years, your payment savings total $41,400 but your balance only drops to $233,563. If you don’t refinance, your balance drops to $200,834, a difference of $32,729. This is only $8,671 less than the total payment savings.

Am I suggesting that you don’t refinance? Not at all. My advice has remained consistent for 20 years. Take a no-closing-cost loan. As of this writing, the rate would be closer to 4.75 percent. Your balance would remain $283,000 because there are no fees to add to the loan amount. The new monthly payment would be $1,476.

If you want to pay off the new loan in 23 years, my amortization schedule tells me a making a monthly payment of $1,687 would do the trick. This is $105 less than your current payment.

This is a complete apples-to-apples comparison. Your balance doesn’t increase, your term doesn’t increase, and your payment decreases by $105 per month.

Your loan officer should have recommended this refinance program.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.

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