Time to refinance

Question: Refinance or additional payments towards principal? After Amy Scott's report on falling interest rates I decided I must stop wondering and look at the numbers.

Original loan: $93,500 Balance: $68,500
6.5% with 247 payments remaining.
Current payment $590 + $245(escrow)= $835
I've been paying $1000 each month

I've always paid extra towards the principal since I bought the house in 2000. We have also been thinking about moving to the mountains of Western NC but no definite plans since we have no jobs there at this time. If we were to move I assume we would rent for a time and would like to try to keep the house at the beach. If we were to refinance what's the best way to shop for a new loan? Thank you, Chris, Nags Head, NC.

Answer: It might not be an either/or question. You sure seem to be a candidate for a refinancing. That is, unless you really do plan on moving in a year or two. In that case it wouldn't be worth the fees you have to pay to refinance the mortgage. When you refinance you want to recoup the costs in about two years. The other issue, of course, is the appriased value of your home.

Assuming you decide to refinance and the value is there in your home I would recommend what's called a rate-and-term refinancing. You pay off the old loan with a new lower rate loan. However, you don't take any cash or equity out of the home. You don't lengthen the term of the remaining mortgage, either. A good refinancing resource is the Refinancing Starter Kit by HSH.com.

I would also suggest running the numbers to see if you would want to refinance into a 15 year mortgage. I went to Dinkytown.net and quickly plugged in some figures. (I didn't have enough detail to do more than a quick approximation). Anyway, your monthly payment would be about the same with a 15 year mortgage as with your current mortgage (before taking into account the extra payment to principal). You could then decide to continue to make exra payments if you want or put the money into another investment.

I would get in touch with your local credit unions and community banks to see what they are offering. Websites like bankrate.com and hsh.com are useful, too.

Get all quotes in writing and make sure you get all the costs involved in a refinancing. Armed with this knowledge I would then contact your current mortgage lender and see what kind of a deal it will cut for you. You're a good customer and it might (and should) give you a break on costs.

By the way, if a lender asks you to pay a fee to get a quote go on to the next one. You don't spend money on application fees while you're shopping for a refinancing deal. .

About the author

Chris Farrell is the economics editor of Marketplace Money.

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