Question:
Dear Steve,
My husband and both work and we have a combined income of 91,000. My husband took a cut in pay when we lost his job. We have excelled credit. Due to some not so sound decisions, we refinanced for 30-year mortgage. We did try applying for HARP but stated we made to much at the time,
My question is there any way that we can refinance for fewer years? We did come to some money and want to put down 20,000 but the bank is telling it will only take 3 years off my loan.
Tina
Answer:
Dear Tina,
I’m actually a fan of the 30-year mortgage. It typically gives you a good interest rate and a fixed lower monthly payment. You can always send more than the minimum and pay the loan off early.
Let’s look at a couple of examples using the Credit Karma mortgage calculator and interest rates from Wells Fargo.
On a $300,000 for a 30-year fixed rate, your monthly payment would be $1,565.
For a 15-year fixed rate, your monthly payment would be $2,257.
However, if you had a 30-year mortgage and repaid it at the 15-year monthly payment you could pay off your loan in 190 months but have the flexibility of dropping to a lower monthly mortgage payment if you needed some extra breathing room.
The amount of time any lumpsum payment will save is based on the interest rate on the loan and how long you’ve already had the loan. A lumpsum payment early on will reduce the interest you are paying overall on the loan.
What you really have here is a time value of money math problem but more variables need to be known to calculate the answer specifically for your loan.
For example, I’d need to know the current balance on the loan, the number of months remaining, your interest rate, and the amount of your monthly payment to goes to principal and interest.
But I’m curious if the issue isn’t actually that with the reduction in income, the current home is just no longer affordable. If that’s the case, it might be time to reorganize your current financial life so you can better live within your income.
Considering your financial situation may have dramatically changed, building up your emergency fund and/or retirement savings might make more sense than paying down the mortgage.
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Asked question about paying off mortgage.