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Should I continue to prepay my mortgage or refinance?

Q: Is this worth refinancing? There are no calculators that work for this situation: 30-year, $369,000 mortgage at 4.875 percent that started in October 2010. I began prepaying $350/month immediately. I’m now being offered a 20-year, zero cost refinance for a balance of $332,000 at 4.375 percent starting in April 2014. A: Is it better to prepay or refinance? That's always a good question, and your prepayment of $350 per month is a substantial one. But can you do better?

A: The should-I-refinance question is always tricky. However, there actually is a calculator which works for your needs: HSH.com’s PreFi Calculator.

Utilizing a prepayment refinance calculator

Step 1 (without prepaying): We plugged in the numbers you provided. With a $369,000, 30-year fixed mortgage rate at 4.875 percent and NO prepayment, you have a monthly principal and interest payment of $1,953 and would be on a path to spend $334,404 in interest cost over the life of the loan, which wouldn't end until September 2040. Presently, you are 40 months in and would have another 320 yet to go, and an outstanding balance today of $349,353.

Step 2 (with prepaying): With your $350 per month prepayment, provided it continues until the loan is retired, you will shorten the term of the loan to 237 total months with a total interest cost of $194,951. That's just less than 20 years. Your prepayment creates a lower total interest cost for your loan, and that interest cost matches the total cost of a 30-year loan with a rate of 3.624 percent, so it's almost as if you have already refinanced to a lower rate.

Should you refinance?

So, the question remains: Should you keep along this prepayment path or refinance?

At your present prepay rate you are already on track to retire your loan in under 20 total years. If you refinance to a new 20-year term, you'll need to consider that you've already paid interest for 3.5 years, so the total term of your loans will be 23.5 years. In order to save any money (as the calculator reveals) you'll also need to get a new interest rate for that 20-year term of 4.841 percent or lower (your 4.375 percent offer meets that test).

Utilizing a mortgage calculator

Jumping over to HSH.com's mortgage calculator and looking at the costs of a 20-year, fixed-rate mortgage at 4.375 percent, you'll find a required monthly payment of $2,187 -- about $116 per month less than the total of your required payment and prepayment now, so there are some cash-flow savings to be had by refinancing.

The new loan would see you spend $175,449 in interest, to which you would need to add the $58,509 you've already spent over the last 3.5 years, for a total interest cost of $233,958 over the total term of 23.5 years.

Refinancing: Improved cash flow, but higher total costs

Staying the prepayment course in your present loan will give you a total term of slightly less than 20 years and a total interest cost of $194,951 over that time. In this case, refinancing will improve your cash flow a little, but will also see you incur higher total interest charges due to a longer total term. Also, unlike a refinance, your prepayment is voluntary, so you could stop if the need for those funds arose.

Refinance AND prepay

Of course, you could refinance and then make prepayments of that $116 in freed-up cash flow, but that's a whole different question to be answered. If you want to consider this, please take a look at both calculators, run the numbers and see!

More help from HSH.com

  • Can we do a "cash-in" refinance?

  • How do I remove or add a name to a home loan?

    In general, the only way to remove a name from your mortgage will be to refinance or pay off the debt. This is also true when trying to add names to the mortgage. Lenders will not add nor remove names from such an obligation without the opportunity to ensure that the other borrowers have the ability to pay.
  • I'm an inexperienced refinancer. What can I expect?

    Q: I owe 56,000 on my eleven year old variable rate mortgage at 8%.I have good credit, have been in my home for 11 years and want a 15-year fixed-rate mortgage. While I have a good income, I have no cash for closing costs. Do I need to pay points and fees? Do I need an appraisal? What can I expect when I approach the bank for a refinance?A: If your credit is good and you have equity in your home, you should be able to refinance to a 15-year fixed rate. Lenders will require an appraisal of the property, but you should be able to build the cost of refinancing into the loan amount, or might be able to trade it off in exchange for a slightly higher-than-market interest rate. As the bank about your loan options, and expect that you'll need to fully document your income, debts and assets.
  • I'm trying to refinance a jumbo loan.

  • Is there a ten year refinance mortgage out there?

    Almost any lender that offers a fixed-rate mortgage will offer a 10-year mortgage. Mortgage rates for a 10-year mortgage usually aren't any better than the rates offered for a 15-year mortgage. That said, be sure to shop around to find a competitive rate. Getting a fixed-rate mortgage with a term as short as 10 years will save you a lot of money on interest costs.

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