- - Thursday, September 8, 2011

Q. We have a 30-year fixed-rate mortgage at 4.25 percent with a balance of $320,000 that we took out last October. Our mortgage broker has advised us that the rates aren’t low enough today to refinance again unless we are prepared to pay points, which he didn’t recommend.

He did offer us lower rates on a 15- or 10-year mortgage that were very attractive. He said if we don’t have trouble with the higher payment, a shorter-term loan might make sense.

I don’t see any reason to pay down a loan quickly when we already have such a low rate. Would you recommend that we shorten our loan term?

A. I think your mortgage broker probably is giving you good advice. A good mortgage broker apprises his customers of all products that may or may not be suitable for a borrower. Shorter-term loans have been gaining popularity as rates have declined. Perhaps the biggest reason isn’t just the general decline in rates, but the rate spread among 30-, 15- and 10-year fixed-rate loans is wider than it used to be.

You typically might see a difference of a 0.25 percentage point between a 30-year and 15-year fixed rate. Now it’s closer to 0.50 percent to 0.625 percent.

For example, I might quote you a 30-year fixed rate of 4.125 percent with no fees if you wanted to refinance to another 30-year loan. Even with zero closing costs, it’s not worth the trouble to drop your rate by only an eighth of a percent, especially considering the nonsensical hurdles required to get a loan closed.

A 15-year loan, however, may indeed spark your interest. I might quote you a rate as low as 3.50 percent with no closing costs. The rate difference between 4.125 percent and 3.50 percent is 0.625 percent point. The difference in simple interest on a $320,000 loan is $2,000 in the first year. Now we’re talking about some reasonable savings.

But the 15-year loan, despite the lower rate, will require a higher payment. My calculator tells me your existing principal-and-interest payment is about $1,600 per month with about 29 years left. Refinancing to a 15-year fixed rate would increase the monthly payment by $687, to $2,287, but it would slash 14 years off the term of the loan.

Let’s run some simple numbers: An extra $687 for the next 180 months results in an extra cash outlay of $123,660 over 15 years. But it also eliminates 168 months of your existing payment from the back half of the loan term. Multiply 168 months by $1,600 and you get $268,800. So you spend $123,660 in order to save $268,800 - a net difference of $145,140.

Is this a good deal? It depends on your objectives. If making the higher payments does not affect other financial aspects of your life, it would make sense. If the higher payment would result in taking away from important investments, such as a college fund or a retirement account, you may not want to be in the position of a required 15-year payoff.

Twenty- and 10-year fixed-rate loans also are available and are priced accordingly. Expect the higher rate to be on the longest term loan and the lower rate to be on a 10-year fixed. Your mortgage broker should be able to outline these programs tailored to your particular loan situation.

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

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