Is refinancing the right choice?
The decision needs to be based on your goals and values, and on what brings you peace of mind.
A Get Rich Slowly reader, Kristine, is trying to decide whether she should refinance her mortgage. Here's what she has to say:
I'm trying to decide if refinancing is the right choice for our family. We're living pretty tight right now and the idea of reducing our monthly payment is very tempting. I would love to be able to take the savings and put it toward retirement and possibly some other future goals. However, if we do that, then we'll be paying thousands of dollars extra in interest over the life of our mortgage.
Is it better to take the monthly savings and put it away anyway, or wait another 23 years until the mortgage is gone? (Hopefully our finances will change before that time and we will have extra money to start saving before then.)
I've been playing with all of the calculators, but am still overwhelmed by the decision and am not 100% sure that I'm realizing all of the pros and cons. What do you and your readers think? I realize no one can make the decision for me, but input is helpful.
Kristine supplied some additional information with her question. Her original mortgage was for $161,000 in June 2003. It's a 30-year mortgage with a fixed rate of 5.375%. Her family does not make extra payments, and they do not have PMI (private mortgage insurance). The mortgage has a balance of $141,850.
Her family's only other debt is a small balance on an auto loan that they hope to have repaid by the end of the year. They'll then take the amount from the car payment to start saving for another car when the current one bites the dust. (Awesome method, by the way. That's what I've been doing -- until I routed the money to my upcoming Africa trip, anyhow -- and it's an idea popularized by Dave Ramsey and others.) Kristine says she might be willing to take a portion of that money to apply to a different savings goal.
No right answer
As with all questions of this nature, there's no one right answer. Kristine's decision needs to be based on her goals and values, and on what brings her peace of mind.
When my wife and I were faced with a similar decision two years ago, we opted to refinance. We dropped our interest rate from 6.25% to 4.96%. We chose to stick with a 30-year loan instead of moving to 15 years because we liked the idea of having lower payments in case we needed the cash flow for something else. (However, we decided to keep paying what we'd always been paying in the meantime.)
For us, peace of mind meant paying aggressively now, while we can, but leaving open the option to use the money for other purposes in the future.
So, obviously I think that refinancing can be a good idea. The trap, however, is refinancing to free up cash flow, but then frittering away that cash flow on stuff.
Using it to keep paying down the mortgage? Great. Using it to pay off high-interest debt or to fund retirement? There are arguments for and against, but if that's what will help you sleep at night, I say do it. Using the extra cash flow to fund a trip to Tahiti? Probably not a good idea. And I wouldn't recommend buying new books or boats or computers with the money, either.
Since Kristine wants to hear what you would do in her situation, here is a mortgage calculator so that you can run various scenarios. (I used mortgage rates from HSH and other sites to run what-if scenarios.)
So, based on the information Kristine has provided, and based on your own experience, what would you do in her situation? Would you refinance your mortgage to free up cash flow for other goals? If you've done something like this already, how has it worked out? Would you do it again?
We've covered variations on this theme several times in the past at Get Rich Slowly. Here are three related articles from last year:
- Ask the readers: When does it make sense to refinance a mortgage?
- Refinancing made easy: Our story (in which I describe how Kris and I refinanced our mortgage).
- Does it still make sense to refinance in today's market (advice from an actual mortgage expert).
Finally, here's an old post in which my pal Nickel shares his thoughts about how to decide when to refinance your mortgage.
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