- - Thursday, September 27, 2012

Q. I applied for a refinance about a month ago. We are reducing our 30-year fixed-rate loan from 4.50 percent to 3.50 percent with no fees. While we are waiting for approval, I’m beginning to have second thoughts about the wisdom of this move.

While lowering the interest rate is a good thing, we are concerned that any savings in payment will be offset because we are starting all over again on a 30-year loan. My wife says the refi is just a way for the loan officer to make money because we have to start all over again.

Our current loan has 25 years left, and it seems as if any interest savings will be washed away on the back end. Our loan balance is \$323,000. Thoughts?

A. The primary litmus test in determining whether a refinance makes sense is comparing the new rate and its associated fees with the existing rate. Because your refinance carries no fees and you’re dropping your rate by a full percentage point, I can tell you this absolutely makes sense.

While your question is valid, your wife’s logic has one critical flaw. You don’t “have” to start all over again. Just because your promissory note allows you pay off the loan in 360 equal monthly installments, it doesn’t mean you have to.

A good loan officer always will point out that a drop in monthly payment as a result of a refinance is a function of two things: a lower interest rate and a stretched-out loan term.

You have given me enough information to dissect your situation, so let’s run some numbers.

If your existing loan is five years into a 30-year term and your balance is \$323,000, your beginning balance was \$355,000. At 4.50 percent, your monthly principal and interest (P&I) payment is \$1,798.

A new 30-year loan at 3.50 percent with a beginning balance of \$323,000 will require a monthly P&I payment of \$1,450 — a decrease of \$348 per month. This payment drop is a function of a lower rate and a stretched-out term.

Tell your wife that a 30-year term can be 30 years or anything less than that. Any amortization program online or on a calculator can tell you what payment is required to pay off your new loan in 25 years, the remaining time on your existing loan.

My calculator tells me your P&I payment would need to be \$1,617 — \$181 less per month than your current payment.

So the refi enables you to lower your payment by \$181 per month and still pay off the loan in 25 years. If lowering your payment isn’t your objective for the refi, my calculator tells me that by continuing to make your current P&I payment of \$1,798, you would be able to pay off the loan at the lower rate in 255 months, or a little more than 21 years, enabling you to shave almost four years off the term. It’s your choice.

The bottom line: If you can lower your interest rate and pay little or no fees, refinancing makes sense.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to [email protected]