Mark your calendars. The Van Ripers, of St. Paul, Minn., have moved up the date of their mortgage-burning party.
The Van Ripers have moved up the date of their mortgage-burning party. When the couple purchased their St. Paul, Minn., home in 2005, they locked in a 6 percent interest rate for 30 years.
But with mortgage rates at jaw-dropping lows, they refinanced into a 4.125 percent, 15-year mortgage that will save them more than $100,000 in interest and allow them to pay off the mortgage by the time their 3-year-old son is in college. All this for a $100 increase in their monthly mortgage payment.
Refinancing to a shorter-term mortgage if you can afford the payment seems like an obvious smart-money move. You’ll pay far less in interest, get rid of the monthly fixed expense earlier, and have freer cash flow in retirement.
Plus there’s the high that homeowners feel when they imagine making their last mortgage payment.
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“It’s just nice to think it’s going to be done,” said David Van Ripe, 33.
But there’s a camp that thinks locking into a shorter-term mortgage is unwise, especially when 30-year mortgage rates are low and the economy is uncertain.
Alex Stenback, a mortgage banker with Residential Mortgage Group in Minnetonka, Minn., said this difficult economic stretch has brought out the conservative side in most of us.
“When savings rates go up, when people start talking about 15-year mortgages or paying their mortgages off ahead of schedule, that’s really just a form of self-insurance. They’re no longer as comfortable with the fact that the sky’s the limit and the ladder goes up for them economically,” he said.
Anticipating your financial future is difficult, but that’s what Bill Schwietz, president of the Minnesota Mortgage Association, tries to get clients to do. He’s seen several friends who started with 30-year mortgages and refinanced to 15-year loans with a big promotion and refinanced into a 30-year loan again when their children’s hockey fees and school tuition became too much.
Problem is, you lengthen your loan and roll in closing costs with each refinancing.
Kate Wilson, branch manager for Fairway Independent Mortgage in Bloomington, Minn., said 15-year loans can make sense. But she always reminds her clients that there’s no law against paying off a 30-year mortgage on a 15-year schedule.
Here’s the example she calculated: On a $200,000, 30-year mortgage at 4.5 percent, you’ll pay $164,813 in interest with a monthly payment of $1,013.37. Pay down that loan in 15 years (by making prepayments of about $517 a month on the mortgage balance) and your monthly payment would be $1,529.98 and you’d pay $75,396 in interest. If you went with a 15-year mortgage at 4 percent instead, you’d pay $66,286 in interest and have a payment of $1,479.37.
So ask yourself if you’d be willing to pay a few thousand dollars more in interest for the flexibility of having an extra $500 a month to cover life’s expenses without tapping home equity. Also assess whether you’re disciplined enough to prepay the loan. If the answer is no, a shorter-term mortgage is a good fit if you can afford it.
Most mortgage bankers have calculators on their websites. The financial calculator site dinkytown.net has several calculators to choose from, including a 15-year versus 30-year mortgage calculator.
There’s also the government’s Home Affordable Refinance Program and the short refinance program for non-FHA borrowers who are underwater. Learn more about both at www.hud.gov/.