How to Decide Whether to Refinance a Fixed-Rate Mortgage

If you have a fixed-rate mortgage and interest rates drop, you may want to refinance the same mortgage loan to reduce your monthly payments. The following table shows monthly payments for 15- and 30-year fixed-rate mortgages.

Interest Rate Monthly Payments (30 yr) Monthly Payments (15 yr)
6% $600 $843
7% $665 $898
8% $733 $956
9% $805 $1,075
10% $878 $1,104
11% $952 $1,137
12% $1,029 $1,200

When you decide whether to refinance, consider the following:

  • Closing costs will add to the principal. Every time you redo the paperwork, a whole assortment of people, from the lender of the title company to the appraiser, get to charge you some sort of fee. You have to add these refinancing fees into the loan principal.

  • When do you plan to move? Your monthly payment may go down, but whether that saves you money in the long run depends on how long it takes to make back the money you spent for the new loan. When you start the new loan, your first payments go almost exclusively to interest. If you sell the house after two years, you save money by making lower payments for two years, but you actually owe more on the loan than you did in the first place.

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