In a word, no. This is not possible. I wrote a blog back in 2011 in another feverish refinance market showing the numbers on how you can’t shorten the term of your loan from 30 to 15 years without increasing your monthly mortgage payment. Those numbers bear repeating in the current interest rate climate and are below. Check out this hypothetical example:
Current 30-Year Fixed Rate Mortgage:
30 Year Fixed Rate
$500,000 @ 5.50%
= $2838/month principal & interest payment (not including taxes and insurance)
New 15-Year Fixed Rate Mortgage:
15 Year Fixed Rate
$500,000 @ 3.50%
= $3574/month principal & interest payment (not including taxes and insurance)
In order for the above refinancing to work one would need to reduce the interest rate from 5.50% on their current 30 year loan to 0.25% on a new 15 year loan. That is the only way to keep the payment the same. That’s right…0.25% interest rate on a 15-year loan! That is almost a free mortgage!
Note: To calculate the monthly payments for your scenario use this mortgage loan calculator.
Actual 15-Year Fixed Rate Mortgage
$500,000 @ 0.25%
= $2830/month principal & interest payment (not including taxes and insurance)
If rates fall that low, we have much bigger problems in the economy to worry about than when an appropriate time to refinance is.
Do yourself a favor and take a hard look at why you are refinancing and make sure it is justified based upon your current financial situation.
I see too many people refinancing to a new 30 year loan and starting the 30 year mortgage clock over again, to save a small amount monthly like $80 a month. Why pay $4,000 in refinance closing costs to save $80/month when you may sell and move out of the house in 3-5 years? You’ll only be supported in this decision if you talk to the wrong mortgage loan officer. Instead of trusting a salesperson, think through the numbers on your own instead. I’ll give you some things to think about when refinancing below.
The Do’s & Don’ts of Refinancing:
Many of the rules of thumb about when to refinance are wrong. The lender or broker may just be interested in making money, not saving you money. Here are some tips of what to do and what not to do when refinancing your mortgage.
- Don’t pay points on a refinance. This will keep costs low.
- Don’t buy into “no cost” refinancing advertisements. They are simply building the costs into a higher interest rate.
- Don’t refinance from a conventional loan to an FHA loan, the mortgage insurance cost on an FHA loan is enormous.
- Don’t solely shop price! Shop a lender’s experience and execution. It is a very difficult time in the mortgage industry and shopping price may get you in trouble. There is no free lunch.
- Do keep in mind that you still have to qualify with the proper debt ratios, income and credit.
- Do consider paying your loan down if you have the assets and your appraisal comes in lower than needed.
- Do a simple calculation of the recapture period. Then see if are you happy with your actual savings (considering the closing costs) in the long run. Will you recapture your closing costs within 12 to 24 months on the new mortgage?
How to Calculate Your Recapture Period:
The steps below offer a hypothetical example of a 5.50% interest rate 30-year mortgage refinance to a 3.50% interest rate 30-year mortgage with a balance of $500,000.
Step 1: What is your current mortgage interest rate and monthly payment?
Example: 5.50% interest rate, monthly payment $2,839
Step 2: What is the new refinance mortgage interest rate and monthly payment?
Example: 3.50% interest rate, monthly payment $2,245
Step 3: What is your monthly savings?
Example: $2,839 – $2,245 = $594
Step 4: What are you spending in closing costs?
Example: Closing costs: $5,000
Step 5: Divide the closing cost from the new monthly savings amount.
Example: $5,000/$594 = 8.41 months recapture period, or 9 months rounded up.
In this example, the refinance is generally worth doing since the closing cost recapture will occur quickly.
Note: To calculate the monthly payments on the interest rate, use this mortgage loan calculator.
Let’s do this calculation again, but show a refinance that may not be beneficial or wise to pursue. Say you have a 4% interest rate on a 30-year mortgage and you want to refinance to a 3.50% interest rate on a new 30-year mortgage with a remaining balance of $500,000.
Step 1: 4.00% interest rate, monthly payment $2,387
Step 2: 3.50%, monthly payment $2,245
Step 3: Monthly savings of $142
Step 4: $5,000 in closing costs
Step 5: $5,000/$142 = 35.2 months or almost three years rounded up. Three years seems like a long time to wait for a return on your closing costs. But if you are certain you will have the mortgage and own the home for a very long time, maybe it makes sense.
If you have any further questions about refinancing feel free to contact me or comment below. You can also read these other tools and articles about refinancing.