Taking a Closer Look at a 15-Year Mortgage Refinance

(updated 08/22/2020)
Mortgages refinance with a Bank or Mortgage Company can be a great tool to saving yourself some money. We get these offers in the mail, by phone, by email, on social media, you name it. But, is a lower refinance interest rate with the mortgage company always worth the deal?

For example, if you currently have a 5% mortgage with 25 years left to go on paying off that mortgage, is it worth it to do a refinance for a 3.5%, 15-Year mortgage? Why? For me, the answer is Nope; especially in these uncertain economic times. Here’s why:

• Let’s assume I have a mortgage for $150,000 with 25 years remaining @ 5% and as such my monthly mortgage payments are approximately $877 per month.

• The mortgage company is offering a 3.5%, 15-Year mortgage refinance; however, there are usually fees one way or another with doing a refinance and these fees can easily be 5% of the mortgage balance so the amount refinanced is now $157,500 (150,000 x 1.05 = 157,500). They usually rush through this part of the “details” if you want to call it details.

• My new monthly payments for a $157,500, 3.5%, 15-Year mortgage are now approximately $1,126. In other words, paying $1,126 for 15 years fully closes the deal, the title is yours, and you don’t owe a penny anymore except for taxes and insurance. $1,126 x 180 months = $202,680 total payments; not bad.

• My choice would be to “refinance” without the mortgage company involved thereby cancelling all closing fees and any other related mortgage refinance fees. My mortgage balance remains at $150,000, at 5% (my rate technically still remains the same), for 15 years which works out to my new monthly payments of approximately $1,187 per month. $1,187 x 180 months = $213,660 total payments.

• The difference in the two total payments in the amounts of $202,680 (with the mortgage company) vs $213,660 (without the mortgage company) = $10,980. At first glance, it looks like this is a bad deal all around and I actually will end up paying more over the course of the 15 year period.

• But here is the deal, I have lots of flexibility doing my own “refinance” vs refinancing with the mortgage company. I can drop back and revert to my lower monthly payments during tough economic times or times of emergency; Or, I can step up the pace and increase my monthly payments when my finances improve. Remember, my only fixed obligation is set at my original mortgage agreement for $877 per month. So, I can drop way back from $1,187 to $877 payments per month without penalties, forfeiture of my interest rate, threat of a foreclosure, and whatever else. This is the luxury I have for not refinancing with the mortgage company. Is it worth taking a flexible “refinance” for $1,187 vs a locked-in, fixed contract official mortgage refinance for $1,126, in these uncertain times? Absolutely!

• Had I chosen the locked-in, fixed contract mortgage refinance (15 yrs) for $1,126, I would be stuck with a minimum monthly payment obligation of $1,126; minimum. I can pay more without penalty; but I can’t pay less without penalty; forbearances still have to be paid even if granted. I’m stuck; I have no wiggle room; in times of an economic crunch this can easily lead to undue stress and possibly a foreclosure.

• What if I just happen to be Mr. Fortunate, and I can do a “self-refinance” for 12 years; now my payments work out to be $1,387; about $260 more than the official mortgage company refinance for 3.5% ($1,126 – remember?). But, here is the deal, at $260 more per month I get done in 12 years as opposed to 15 years. Here is another deal, over 12 years I’d end up paying $199,728; as opposed to over 15 years paying back $202,680. Interesting. And as before, if I need the safety net and need to drop back down to making $877 monthly payments, I can without worries.

Here is the take away: sometimes it got to be really really worth it to sign that official mortgage refinance. Maybe a 2% 15 year mortgage refinance would get me to take a closer look and perhaps change my mind. But, it’s got to be worth it; considering the economic cost and not just the financial cost.

Until next time, check in with us from time to time for more helpful tips to know as a small business owner. #SanzVirtualEnterprise #Forward #SmallBusinessAccounting #SmallBusinessTaxes

*  Note: “Refinancing” without the mortgage company is consistently referred to in quotations because it is not an official actual refinance; it is more a restructuring of the terms/months vs the interest rate.