Yes, it's always better to have a lower interest rate on
your mortgage than a higher one. But one thing people seem to overlook is the
matter of the term involved. "We can drop our monthly payment from $1,000 to $800. And
even finance the new closing costs! Why wouldn't anyone do it?"
Perhaps you should, particularly if present monthly
payments are your main concern. But before you do, you should
understand:
If you're already five years into your present 30-year
mortgage, and you're signing on for another, you'll end up
paying for your home for a total of 35 years. Some of the
monthly savings is indeed due to a lower interest rate. But
the rest comes because you'll be paying five years longer than
originally scheduled.
That may or may not matter to you, if current costs are
your most important consideration right now.
But the right way to figure savings is to compare the 25
years left on your old 30-year loan, with the monthly cost of
a new 25-year mortgage. Perhaps your $1,000 payment would
drop to only $900 in that case. $100 a month is the true
savings at the new interest rate.
If, after that, you decide to go for a new 30-year
mortgage anyhow, at least you'll realize what's involved.
You might want a new 7 percent loan for as long as
possible, if you have the discipline to do something useful
with the monthly savings. Paying off a high-interest credit
card is always a wise first investment. You may have a new
business venture in mind, or prefer the uncertainty and risk
of dabbling in the stock market.
If you're handling your present payment comfortably, and
you will need extra cash as the kids approach college age, you
might want to take a different tack altogether, refinancing
with a 15-year or even 10-year loan. Even though your monthly
payment would remain the same, you'd clear up the debt sooner
than originally scheduled.
As with most other financial decisions, there's no hard
and fast rule on what's best for your particular situation.
Financial advisors will often answer some of your
questions with a firm "It all depends."
Related Articles:
Great Idea: The Automatic Rate Reduction Loan
Real Times Interest Rate Watch
Refi-Mania, Is it Time to Refinance?
To Refinance or Not to Refinance? That is the Question ...
Published: May 10, 1999
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