Question
Dear Dr. Don,
Our lender offered refinancing at a lower payment or adding $50 more to the current payment and cutting the years I owe. I don't understand how this works. I have a 30-year, fixed-rate mortgage that I have been paying on for five years at 6.75 percent interest. They also want to charge me to continue the process. Is this normal?
Any advice would be helpful.
-- Dylan Dilemma
Answer
Dear Dylan,
You can use Bankrate's mortgage calculator and amortization table to see how making an extra payment every month shortens your mortgage loan term and reduces your total interest expense. There shouldn't be any fees or expenses in pursuing this strategy.
Given today's market rates, and the fact that you're only five years into a 30-year mortgage, refinancing a 6.75 percent loan makes perfect sense. At this writing, Bankrate's national average for a 30-year loan is 4.95 percent. If your credit is good and you have enough equity in the home to make this work, refinancing can work for you, assuming you plan to be in the house long enough to recoup the costs of refinancing.
That's no doubt what the bank people were talking about when they talked about charging you to continue the process. Bankrate's 2010 Closing Cost Survey pegged the national average for closing costs on a $200,000 new-purchase mortgage at $3,741. A refinancing should be a little less, but it won't be free. You can use Bankrate's refinance mortgage calculators to figure out how long it takes to recoup your financing costs and the expected interest savings.
