Q: I have $70,000 and 12.5 years remaining on a 20-year loan at 5.75 percent. My credit is great but I have no cash to pay closing costs. Should I refinance?
A: Depending upon what you are hoping to accomplish with your refinance--a faster payoff or an improvement in cash flow--there are options available to you. First, you can trade off closing costs in exchange for a slightly higher-than-market interest rate, usually about a half-percentage point or so. HSH.com's Tri-Refi Calculator can help you see how this might work for you versus increasing the loan balance.
If you are trying to save on interest costs, you might consider taking a 15-year fixed rate. Rolling in the refinance costs should give you a working rate of perhaps 4 percent, which would save you about $5,000 in interest cost over the life of the loan.
To get the most benefit, you should consider making prepayments to shorten the term of the loan so that it runs close to your remaining 12.5 year time frame. The 4 percent, 15-year refinance should lower your monthly payment by about $142 per month; if you commit some of that back--$82.22 each month, making your new loan's payment an even $600--you can save nearly an additional $5,000 in interest cost and the loan will run for about 12.33 years. Use HSH.com's mortgage calculator to help see these effects.
If you are looking to improve your cash flow, a new 20- or 30-year term will not save you any money in the long term, but would drop your monthly payment by $250 to $350 per month... but of course, the total interest cost would be much higher than if you didn't refinance.
