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Refinance or Not

Daniel Cohen
UpdatedOct 7, 2010
Key Takeaways:
  • Weigh the total costs of each option, before deciding to refinance.
  • Consider an adjustable rate mortgage, if you can pay off the loan before it adjusts.

I have paid my loan down aggressively. Does it make sense to refinance at this point?

I refinanced in Oct 2002 to a 15-year fixed 5.5% for $145,000. We paid the mortgage off aggressively and now only owe $66,000, about $15,000 variance on the good side. I also have a $21,000 line of credit at 3.25% variable rate for a family room which we just built. My total debt is about 87,000 which we plan on having paid off in 5 years. My question is, should I refinance? My wife and I both have credit scores over 800. I was eyeballing a home equity line of credit that is currently 2.74% apr (variable), but no closing costs. That's half my current 5.5 rate and .50 below the 3.25 apr. I don't really think that I would comfortable with the variable rate, but ING Orange is advertising a 5-year fixed ARM at 3.125% with closing costs around $700. I would appreciate your input to my financial query.

by any historical measure, q4 in 2010 is an excellent time to refinance with interest rates at levels not seen in several generations. the answers to your questions are in the numbers. you did not mention how often the heloc will adjust and what the caps on the adjustments will be. also, i am not sure how much interest you are paying on your primary mortgage and how much is going to principal. the less you are paying in interest, the less benefit there is to refinancing. if you are confident that you can pay the balance off in five years, i think the 5-year fixed arm is a solid deal. i suggest you crunch the numbers this way:

  1. what would your total costs be, were you to maintain your two current mortgages and pay them as you plan?
  2. what would your total costs be, were you to take the 5-year arm and make the same monthly payment as in the first scenario?

if option two saves you the most money, then weigh how comfortable you are in the arm. if you are very confident it will be paid off, go for it. if you are not so confident, the arm may not be the way to go. however, even if it takes a bit longer than 5 years to pay off, you will owe so little at the end of five years that the potential upward adjustment on your remaining balance is likely to not be very significant. i recommend you shop around for the best loan you can find. start by visiting the refinance savings center to get no-cost quotes from mortgage refinance providers.

i hope this information helps you find. learn & save.