Is refinancing a home loan worth it?

Q:

I was trying to do a streamlined refinance of my mortgage and was told the lender can’t lower the interest rate on my loan without changing the number of years left on the loan.

I haven’t refinanced since I bought the home in 2002. I have a 5.5 interest rate. How do I figure out if a refinance is worth it?

A:

I guess by “streamlined,” you mean a lower interest rate (and lower payments) and everything else stays the same. Sounds good.

And if you have the ability to work with your current lender, you might be able to get better terms without too much effort.

But you might be able to get even better terms if you shopped around and found a new lender.

Here are some things to consider that can help you decide whether refinancing into new terms is worth it:

How much time do you have left on your current mortgage term?

How much of your current monthly payment goes toward principal?

Is the loan adjustable or fixed?

How much are the refinance fees?

If you’ve had your mortgage for several years, you may not benefit too much from a refinance unless the interest rate is considerably lower.

This is because with a 30-year mortgage, most of your payment every month goes toward interest for the first 10 to 15 years.

After that, the pendulum shifts and you begin paying more on principal.

If you refinance halfway through a 30-year mortgage into another 30-year mortgage, you might think the lower monthly payment is a better deal for you, but you would have added an additional 15 years of payments, most of them going toward interest.

On the other hand, if you refinance midway through a 30-year loan into a 15-year loan, you might have higher monthly payments (even with a lower interest rate), but a better deal overall.

You should not base your decision to refinance solely on how much you will save each month, unless, of course, you are in danger of losing your home altogether, and the lower payment would help you keep it.

In deciding to refinance, you should compare the new and old monthly payments but also compare how much you will pay over the life of the new loan with how much you will pay on the old loan.

If you can shave several years off your mortgage, a higher monthly payment might actually be the better deal.